Aggregate Demand and Aggregate Supply: Assume that the economy is in short run equilibrium, and experiencing...

Aggregate Demand and Aggregate Supply: Assume that the economy is in short run equilibrium, and experiencing a recession

Build the Aggregate Demand/Aggregate Supply graph which corresponds to this situation. Remember to label everything (all curves and axis and equilibrium) and include the long-run potential curve.

Suppose The Fed were to make an open-market purchase of $200 million in US Treasury bonds. Is this a shift or a movement along a curve? Which curve? Graph it in such a way that the Recessionary Gap is closed.

Now assume that the Government institutes a large tax cut for consumers. What curve shifts? Why? What will happen to the Price Leave? Now graph it. (Full points for explanation AND graph)

Given your answer/graph in part c, is the economy experiencing a recessionary gap, an expansionary gap, or no gap? If there is no further government of Fed policy, what will happen in the long-run? (Specifically explain the process by which your gap, if it exists, will be eliminated without government involvement). Now graph it. (Full points for explanation AND graph)

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Expert Solution

Rahul Sunny answered 1 year ago

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