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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

The chapter suggests that the economy, like the human body, has “natural restorative powers.”

a. Illustrate the short-run effect of a fall in aggregate demand using an aggregate-demand/aggregate-supply diagram. What happens to total output, income, and employment?

b. If the government does not use stabilization policy, what happens to the economy over time? Illustrate this adjustment on your diagram. Does it generally occur in a matter of months or a matter of years?

c. Do you think the “natural restorative powers” of the economy mean that policymakers should be passive in response to the business cycle?

Subpart (a):

To determine

Natural restorative powers of the economy.

Explanation

Figure 1 depicts the short run effect of a fall in aggregate demand.

In Figure 1, the horizontal axis represents the quantity of output demanded and supplied, and the vertical axis represents the price level...

Subpart (b):

To determine

Natural restorative powers of the economy.

Subpart (c):

To determine

Natural restorative powers of the economy.

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