Question

(1) Please find the percentages for C, I, G, and Xn for the United states for 2019 In 2019, U.S. GDP was 70% personal consumption, 18% business investment, 17% government spending, and negative 5% net exports.

(2) Please draw Aggregate Demand, Short Run Aggregate Supply, and Long Run Aggregate Supply as if an economy is in both short run and long run equilibrium.

(3) Suppose the United States government decides to add solar panels to federal government buildings. Show how this will affect the model starting from (2) above (assuming the model represents the United States). What happens to GDP, The Price Level, and Potential Output? Is the economy in a recessionary gap or an inflationary gap?

(4) Explain in detail and show graphically how the economy will naturally return to long run equilibrium after the event from (3) above.

(5) Suppose Canada stopped purchasing beer from the United States. Show how this will affect the model starting from (2) above (assuming the model represents the United States). What happens to GDP, The Price Level, and Potential Output? Is the economy in a recessionary gap or an inflationary gap? (6) Can you explain in detail and show graphically how the economy will naturally return to long run equilibrium after the event from (5) above.

Answer 1

Question:

2). Answer:

In this graph the economy is in both short run and long run equilibrium at the point E1.

3). Answer:

Now, the United States government decides to add solar panels to federal government buildings then it will increase government spending and increasing government spending will increase AD that will shift AD curve right from AD1 to AD2 that will increase price level (inflation) and output (real GDP). Potential output will increase and the economy in an  inflationary gap. Here the equilibrium point is E2.

4). Answer:

Now, the United States government decides to add solar panels to federal government buildings then it will increase government spending and increasing government spending will increase AD that will shift AD curve right from AD1 to AD2 that will increase price level (inflation) and output (real GDP). Potential output will increase and the economy in an  inflationary gap. Here the equilibrium point is E2. At this equilibrium point price level will increase that will increase inflationary pressure and workers will demand for more wages and other side the producer will want to make more money. So, here producers will reduce production level and SRAS curve will shift left from SRAS to SRAS2. Now the economy will reach at it potential level at the equilibrium point E3.

5). Answer:

Suppose Canada stopped purchasing beer from the United States then it will decrease export level of the USA. Decreasing export level will decrease net export and decreasing export level will decrease AD. Decreasing AD will shift AD curve left from AD1 to AD2. At this point price and GDP level will decrease and the economy in a recessionary gap. But here, decreasing price will increase AD and AD curve will shift right to AD3. Now at this equilibrium point price level will increase that will increase inflationary pressure and workers will demand for more wages and other side the producer will want to make more money. So, here producers will reduce production level and SRAS curve will shift left from SRAS to SRAS2. Now the economy will reach at it potential level at the equilibrium point E3.