Question

In: Economics

Using the AD-AS model show what will happen to the equilibrium level of output Y and...

Using the AD-AS model show what will happen to the equilibrium level of output Y and the level of prices P if

a. There is an increase in oil prices.

b. The government raises taxes.

c. There is an increase in oil prices and the government increases spending to fight a recession.

Solutions

Expert Solution

b.

In the AD-AS model, when government increase taxes, then disposable income of the people decrease, so they consume less and therefore the consumption decreases. Since consumption is the part of the AD, so the AD will shifts leftward from AD to AD1. So equilibrium price decreases and real GDP also decreases to Y1.

c.

When there is an increase in the oil prices and government increases spending to fight a recession, then AD increases because government expenditure increases and government expenditure is the part of the AD, so AD curve shifts rightward from AD to AD1 and AS curve shifts leftward from AS to AS1 due to decrease in the production due to increase in the oil prices.

Hence equilibrium price increases from P to P1 and real GDP may increase, decrease or remains same.


Related Solutions

Using the AD AS model, explain what will happen to the price level and real GDP...
Using the AD AS model, explain what will happen to the price level and real GDP if either the SRAS or AD curve shifts. You are told that 2 events take place and you must explain which curve shifts and in what direction.
In the AD/AS model, what must happen for the economy to be in short run equilibrium?...
In the AD/AS model, what must happen for the economy to be in short run equilibrium? How about long run equilibrium?
(a) Using the Aggregate Demand (AD) model diagram, illustrate what happens to the equilibrium level of...
(a) Using the Aggregate Demand (AD) model diagram, illustrate what happens to the equilibrium level of aggregate output when the Federal Reserve (Fed) engages in a tightening of monetary policy. Make sure you properly label all the axes and curves. (b) Would the Federal Reserve be more likely to engage in a tightening of monetary policy during an expansion or recession? Explain in one sentence. (c) Has the Federal Reserve recently (past 1-2 months) been engaging in a tightening of...
1. Using the Aggregate Demand (AD) model diagram, illustrate what happens to the equilibrium level of...
1. Using the Aggregate Demand (AD) model diagram, illustrate what happens to the equilibrium level of aggregate output when firms start to feel more optimistic about the future and increase their investment. (Hint: What happens to the IS curve?) Make sure you properly label all the axes and curves. Will this lead more likely to an expansion or recession? 2. Using the Aggregate Demand (AD) model diagram, illustrate what happens to the equilibrium level of aggregate output when the Federal...
1. In the AS-AD model, show graphically what would happen to the US economy in the...
1. In the AS-AD model, show graphically what would happen to the US economy in the short-run and in the long-run if aliens doubled the amount of capital in our economy. Label the initial long-run equilibrium with A, the short-run equilibrium with B, and the new long-run equilibrium with C. P on the Y-axis; and Y on the X-axis. 2. In the AS-AD model, show graphically what would happen to the US economy in the short-run and in the long-run...
Using the AD-AS diagram, draw an economy in long run equilibrium. Indicate output and price level...
Using the AD-AS diagram, draw an economy in long run equilibrium. Indicate output and price level as Y1 and P1. Suppose a pandemic is affecting the economy and the Federal government invests heavily in diagnostic and anti-body testing, increasing government purchases by 10 billion. Indicate the effect on the economy using your diagram. Remember, decide which curve shifts and which direction. Indicate the new equilibrium with Y2 and P2. In words, what happens to the economy given the increase in...
1. Using the AS-AD model diagram, illustrate what happens to the LONG-RUN and SHORT-RUN equilibrium level...
1. Using the AS-AD model diagram, illustrate what happens to the LONG-RUN and SHORT-RUN equilibrium level of aggregate output and inflation, when the economy is hit by a negative (adverse) demand shock and there is NO POLICY response. Suppose the economy is at a long-run equilibrium before it is hit by the negative demand shock. Make sure you properly label all the axes and curves. Will the negative demand shock more likely lead to an expansion or recession in the...
Using the AD-AS model, graph and explain what would happen to unemployment and inflation in the...
Using the AD-AS model, graph and explain what would happen to unemployment and inflation in the following situations. a) Assume the economy begins at potential output. Consumer confidence rises. What is the short run effect? b) Starting with the previous question, consumer confidence rises. What is the long run effect?
Suppose an economy experiences an increase in exports. a) Show graphically using AD-AS model how the price level and output are affected in the long-run.
Suppose an economy experiences an increase in exports. a) Show graphically using AD-AS model how the price level and output are affected in the long-run. b) Can the government use monetary policy to offset the effects on price level and output, explain.
Using the IS/LM and AS/AD framework, discuss what would happen to r, y, and the price...
Using the IS/LM and AS/AD framework, discuss what would happen to r, y, and the price level (p) in both the short and long run. Show the IS/LM and AS/AD graphs for full credit. 1. There is an exogenous decrease in money demand. 2. Consumer confidence increases 3. When discussing the classical model I believe there was some discussion of the effects of a balanced-budget increase in government expenditures (∆G=∆T). Now let’s consider these in a Keynesian model Suppose that...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT