Please use the IS-LM diagram and AD-AS diagram to describe the short run and long run...

Please use the IS-LM diagram and AD-AS diagram to describe the short run and long run effect of positive shock of government purchases.

Solutions

Expert Solution

Aggregate demand = Consumption + Investment + Government spending + Exports - Imports

Rise in government spending will raise aggregate demand in an economy in short run which will shift AD curve to its right from AD to AD1 which raise price level from P to P1 and output level from Y to Y1.

Increase in aggregate demand will shift IS curve to its right from IS to IS1 which will raise rate of interest from "i" to "i1" and raise output level from Y to Y1.

In long run, producers will raise their aggregate supply of goods to complete demand which rises in short run. It will shift supply curve to its right from AS to AS1. It will reduce price to its initial level of P and raise output level further.

In long run, Fed will increase money supply to induce producers to invest. It will lower rate of interest to its initial level and raise output level further.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Use the IS-LM diagram to describe the short-run and long-run impact on national income, the price...

Use the IS-LM diagram to describe the short-run and long-run impact on national income, the price level, and the interest rate of a) An increase in the money supply. b) An increase in government purchases. c) An increase in taxes.

2.)Use the IS-LM diagram to describe the short-run and long-run impact on national income, the price...

2.)Use the IS-LM diagram to describe the short-run and long-run impact on national income, the price level, and the interest rate of (Illustrate your answers with graphs.): a)An increase in the money supply. b)An increase in government purchases. c)An increase in taxes.

For each of the following, use the AD-AS diagram to explain the short-run and long-run effects...

For each of the following, use the AD-AS diagram to explain the short-run and long-run effects on output and inflation. Assume that the economy starts in long-run equilibrium. a. Consumer confidence increases. b. A reduction in taxes. c. A decrease in the money supply by the Fed. d. A sharp, unexpected, increase in oil prices. e. A war increases government purchases.

Use the AD-AS diagram to graphically illustrate the short-run and long run impacts of an increase...

Use the AD-AS diagram to graphically illustrate the short-run and long run impacts of an increase in taxes on the price level and income. Write down the impact of this policy on income, interest rate, unemployment and investment. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium levels; iv. the direction the curves shift; and v. the new short-run and long-run equilibriums.

For each of the following, use an AD-AS diagram to show the short-run and long-run effects...

For each of the following, use an AD-AS diagram to show the short-run and long-run effects on output and inflation. Assume the economy starts in long-run equilibrium. a. An increase in consumer confidence that leads to higher consumption spending. b. A reduction in taxes. c. An easing of monetary policy by the Fed (a downward shift in the policy reaction function). d. Now, in addition to the increase in consumer spending, suppose that the economy experiences a favourable inflation shock...

Predict, with the aid of the IS-LM and the SAS-AD models, the short-run and long-run results...

Predict, with the aid of the IS-LM and the SAS-AD models, the short-run and long-run results when consumer optimism increases. Assume the economy is initially in long-run equilibrium at the natural real GDP. To receive full credit make sure to do the following: (i) Explain why each curve shifts. (ii) Clearly label the starting equilibrium. (iii) Clearly label at least 2 short-run equilibrium points. (iv) Clearly label the final long-run equilibrium. (v) What happens to the interest rate, output, price...

Use the IS-LM diagram to describe the short-run effect of the following changes on national income,...

Use the IS-LM diagram to describe the short-run effect of the following changes on national income, interest rate, price level, consumption, investment and real money balances. a) An increase in Money Supply b) An increase in Government Purchase c) An increase in Taxes

Assume the economy is at full employment. Use the IS-LM/ AD-AS model to show the short-run...

Assume the economy is at full employment. Use the IS-LM/ AD-AS model to show the short-run and long-run impacts of a positive demand shock such as an increase in business confidence and investment spending on: the real interest rate (r), real GDP (Y), unemployment (U), consumption spending (C), the nominal money supply (M), the price level (P) and the real value of the money supply(M/P). You must present properly labeled (IS-LM and AD-AS diagrams to show the SR and LR...

3.)Use the AD-ASdiagram to describe the short-run and long-run impact on national income adn the price...

3.)Use the AD-ASdiagram to describe the short-run and long-run impact on national income adn the price level when (Illustrate you answers with graphs.): a)An increase in the money supply. b)An increase in government purchases. c)An increase in taxes.

3.)Use the AD-ASdiagram to describe the short-run and long-run impact on national income adn the price...

Subjects