a) Using the AD-AS framework discussed in class, demonstrate the impacts of spending on infrastructure and...

a) Using the AD-AS framework discussed in class, demonstrate the impacts of spending on infrastructure and a tax cut on output and inflation in the shortrun.

b) Also explain the likely impact of spending on infrastructure on output in the long-run and show this on your AS-AD diagram.

c) Explain (using your own words) what would happen to unemployment and output in the short run if job support payments (both Jobseeker and Jobkeeper) were switched off.

Solutions

Expert Solution

Solution:

a)When there is an increase in investment in the form of infrastrcture development in an AD-AS framework. The AD-AS framework shows the what determines total supply and total demand.

The AD curve will shift rightwards as there is increase in investment and led to higher output. As the AD curve shifts the Price level will also increase.
The above expalins the change in any component of Y=C+I+G+NX will have a rightward shift or increase the demand in the equlibrium and economy will generate higher output than before. It will lead to a higher price level of commodities prevaling in the market.

b) In Long run the buisness cycle will change and the economy and will lead to boom period.

c) When the job support payments are switche off there will be a reduction in the Governent Spending, Which lead to a leftward shift in the AD curve. In the short run there will be excess supply of labour which leads to unemployment and transient recession in the economy.

Rahul Sunny answered 1 year ago

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