Question

In: Economics

Assume that the economy is initially at the natural level of output. A permanent increase in...

Assume that the economy is initially at the natural level of output. A permanent increase in taxes will cause which of the following?

Question 7 options:

	a decrease in the aggregate price level, and no change in output in the medium run
	a reduction in unemployment in the short run
	a reduction in output and no change in the aggregate price level in the short run
	no change in investment in the medium run
	more than one of the above

Which of the following events will cause a reduction in the aggregate price level?

Question 4 options:

	an increase in T
	an increase in the markup
	an increase in output
	an increase in G
	an increase in the variable z

Expert Solution

7) A decrease price level and no change in output in medium run

( Tax rise will reduce the incentive to invest and consume as less money will be left in the hands of people after paying taxes ,as result aggregate demand will fall,prices will fall .But in the longrun,taxes won't have any effect on natural level output even though prices will remain decreased.)

Other statements are incorrect because

* imcreased taxes will not reduce unemployment in shortrun as the producers will not be in a position to hire more labour

*ln the short run imcresed taxes will result in a decline in prices by reducing aggregate demand

*Taxes will be able to affect investment in medium run because they can influence interest rate.

8)increase in taxation

(With rise in taxes,people will have less income to spend ,aggregate demand will fall and prices will fall.)

Other statements are incorrect because

*increase in mark up leads to mark up inflation.

*G is a part of aggregate demand, a rise in aggregate demand will lead to demand pull inflation.(rise in prices)

*z represents aggregate demand the rise it will lead to demand pull inflation

Rahul Sunny answered 9 months ago

2. Assume the economy is initially in a short-run equilibrium at a level of output below...

2. Assume the economy is initially in a short-run equilibrium at a level of output below the natural rate. a. Use the IS-LM model to graphically illustrate: i) how the economy will adjust in the long-run if the no-policy action is taken. ii) the long-run equilibrium if fiscal policy is used to return the economy to the natural rate of output. b. Explain how investment, the interest rate, and the price level differ in the new long-run equilibrium in the...

Assume the following information for an economy: Natural level of output = $190b Autonomous consumption =...

Assume the following information for an economy: Natural level of output = $190b Autonomous consumption = 50 Total investment = 16 Government expenditure = 19 Autonomous taxation = 20 Marginal propensity to consume = 0.6 Based on this information answer the following questions: a) Calculate the actual equilibrium level of output for this economy. b) Calculate the output ratio for the economy. c) Using the Phillips Curve illustrate the current approximate position for the economy and identify this as point...

Part 7 Assume the following information for an economy: Natural level of output = $190b Autonomous...

Part 7 Assume the following information for an economy: Natural level of output = $190b Autonomous consumption = 50 Total investment = 16 Government expenditure = 19 Autonomous taxation = 20 Marginal propensity to consume = 0.6 Based on this information answer the following questions: a) Calculate the actual equilibrium level of output for this economy. b) Calculate the output ratio for the economy. c) Using the Phillips Curve illustrate the current approximate position for the economy and identify this...

An economy is initially in equilibrium at the natural level. The central bank increases the money...

An economy is initially in equilibrium at the natural level. The central bank increases the money supply. Graphically illustrate and explain short-run monetary nonneutrality and long-run monetary neutrality using the AD–AS model.

Assume that the economy starts at the 'natural rate of output'. Now suppose there is a...

Assume that the economy starts at the 'natural rate of output'. Now suppose there is a decline in net exports due to the global economic downturn caused by COVID-19. Using the AD-AS diagram to show the effects in the short run and the medium run on the output, employment. and the price level. show how expansionary fiscal policy may influence these equilibrium positions.

III. Suppose the economy begins with output equal to its natural level. Then, there is a...

III. Suppose the economy begins with output equal to its natural level. Then, there is a reduction in income taxes. a. Using the AS-AD model, show the effects of a reduction in income taxes on the position of the AD, AS, IS, and LM curves in the short- and medium-run. b. What happens to output, the interest rate, and the price level in the medium run? What happens to consumption and investment in the medium run?

Suppose that we were already at the natural level of output before the increase in government...

Suppose that we were already at the natural level of output before the increase in government expenditure or the reduction in taxes. What would happen to the inflation without monetary policy?

An economy is operating with output $200 billion above its natural level, and fiscal policymakers want...

An economy is operating with output $200 billion above its natural level, and fiscal policymakers want to close this expansionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The marginal propensity to consume is 3/4, and the price level is completely fixed in the short run. To close the expansionary gap, the government would need to decrease or increase spending by ?? billion.

An economy in its long-run equilibrium (i.e., output is at its natural level). Draw a graph...

An economy in its long-run equilibrium (i.e., output is at its natural level). Draw a graph of the AS curve in the short run and the AD curve and, in the graph, denote by A the pair ( Y,P) where the economy finds itself. The economy is now hit by a shock: the power of unions becomes temporarily very high so the cost of hiring workers increases substantially. (a) Is this a supply shock or a demand shock? Explain. (b)...

Accommodative vs. Non-accommodative Monetary Policy: Suppose the economy is initially at potential output. A rapid increase...

Accommodative vs. Non-accommodative Monetary Policy: Suppose the economy is initially at potential output. A rapid increase in energy prices then pushes up the price level. What are the advantages and disadvantages of using accommodative and nonaccommodative monetary policy? In your answer, state the short- and long-run impacts of each policy on the price level and output. Use an aggregate demand graph for each policy option to support your answer.