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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Legislation proposes that the government should use macroeconomic policy to achieve an unemployment rate of zero percent, by increasing aggregate demand for as much and as long as necessary to accomplish this goal. From a neoclassical perspective, how bill this policy affect output and the price level in the short nm and in the long run? Sketch an aggregate demand/aggregate supply diagram to illustrate your answer. Hint revisit Figure 26.4.

Chapter 26, Problem 2SCQ, Legislation proposes that the government should use macroeconomic policy to achieve an unemployment , example  1

Chapter 26, Problem 2SCQ, Legislation proposes that the government should use macroeconomic policy to achieve an unemployment , example  2

To determine

The effect on price level and output in short and long run through aggregate demand/supply diagram, when the government proposes to use macroeconomic policy to achieve an employment rate of zero per cent by increasing aggregate demand for as much and as long as necessary to accomplish this goal.

Explanation

If the government proposes to use macroeconomic policy to achieve an employment rate of zero per cent by increasing aggregate demand, the aggregate demand will automatically shift towards the right and this will in turn shift the aggregate demand to the right from AD0toAD1 with higher output, pressure to raise price level and lower unemployment but in short run.

The change in Aggregate demand is illustrated with the help of graph where the Aggregate demand shifts towards left or right depending on the factors affecting the demand.

In long run the neoclassical suggests that once the economic output increases above GDP and the level of unemployment falls, which in turn will lead to shortage of labor, the high demand for labor will increase the wages

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