Question

Suppose the US economy is currently in long run equilibrium. Predict how each of the following events will likely impact output, employment and the price level in the short run and the long run. Be sure to identify which component of aggregate expenditure will be impacted, and how that will in turn affect either AD or AS (and which direction).

A tax overhaul lowers income taxes and adds $1.3 trillion to the national debt.

Major economic indicators decrease business optimism about future growth in real GDP.

The value of the Chinese yuan falls relative to the $.

Answer 1

A tax overhaul lowers income taxes and adds $1.3 trillion to the national debt.

the lower tax will increase the aggregate demand. The curve will shift rightward and the output will increase. Unemployment will decrease as output increase. and this will led to increase in price.

Major economic indicators decrease business optimism about future growth in real GDP.

Since there will be ecrease in optimism, which means that the the future growth in real GDP will not be great. Hence the expectation about the economy will be gloomy. the aggregate demand will decrease and the curve wil shift leftward. The output will decrease and the umemployemnt increase and the price will increase.

The value of the Chinese yuan falls relative to the $.

Since the value of yuan fall means that effectively the dollar appreciated, hence the export will decrease and the aggregate demand will decrease. It will shift leaftward.

With this the output level will also decrease and the unemployment will increase. the prices will increase too.