If the economy is initially at a long run equilibrium, take each situation given below one...

If the economy is initially at a long run equilibrium, take each situation given below one by one and answer all four following questions for each of them by filling the blanks in the table below. (Hint: Always compare the change in the variable from initial position. Drawing the graphs for each situation should help to understand the change in variables.)

Which curve is going to shift in which direction? (2×4)
Explain how each of these will affect the economy in the short run and the long run (in terms of output, unemployment and inflation) (6×4)
For each of the following what kind of monetary policy do you suggest? (1 ×4)
How does the policy affect the economy in terms of output, inflation and employment? (6×4)

Situation 1: Government decides to take policy to reduce budget deficit. (budget deficit= Taxes – government expenditure)
Situation 2: Construction workers goes on a strike for 2 months.
Situation 3: US dollar depreciates with respect to euro. That makes the import more expensive and export cheaper.
Situation 4: Productivity of U. S workers increase due to technological advancement.

Expert Solution

Rahul Sunny answered 2 years ago

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