Question: Indicate how each of the followig would change either the aggregate demand curve or the...

Question: Indicate how each of the followig would change either the aggregate demand curve or the aggregate... Indicate how each of the followig would change either the aggregate demand curve or the aggregate supply curve. a. Expansionary fiscal policy b. Contractionary fiscal policy c. Supply-side economics d. Demand-pull inflation e. Cost-push inflation

Solutions

Expert Solution

a) The expansionary fiscal policy will cause the aggregate demand curve to shift to the right i.e. at the same price people will be consuming more and more quantity of goods at a higher price. In the short run, it will not affect the aggregate supply curve at all.

b) A contractionary fiscal policy will only affect the Aggregate demand curve in the short run. it will shift the aggregate demand curve to the left i.e. less consumption at the same price. It will decrease the output in the economy and reduce the price because of lower demand.

c) Supply-side economics is positive like reduction in the production tax will shift the supply curve to the right i.e. more production at a lower price. It will increase the aggregate demand and the quantity consumed in the short run, reducing the price and increasing the quantity.

d) Demand-pull inflation is because the aggregate demand curve has gone beyond the potential level of the output. At this level the price will be high, unemployment level below the natural level production will increase in the short run. In the long run, the economy will be back to the potential output because the economy will adjust to the increased input cost.

e) Cost-push inflation is a situation were the aggregate supply curve has moved to left i.e. at a higher cost and lower level of output. it will reduce the output below the potential level of output, in the long run, the prices will increase overall and the economy will reach an equilibrium at the higher price and potential level of output.

Rahul Sunny answered 1 year ago

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