Consider a hypothetical country in which, initially, real GDP equals potential GDP. Suppose that the government purchases increase. All else equal (with regard to the AD-IA model), relative to the short-run level, in the medium run, output is

Consider a hypothetical country in which, initially, real GDP equals potential GDP. Suppose that the government purchases increase. All else equal (with regard to the AD-IA model), relative to the short-run level, in the medium run, output is:

A. higher.

B. lower.

C. the same.

Expert Solution

C) Same

With regard to the AD-IA model relative to the short-run level, in the medium run, output is same

In the long run, real GDP equals potential GDP, and real GDP also equals aggregate expenditure. This means that, in the long run, the price level must be at the point where aggregate demand and aggregate supply meet. ... As prices are greater than the long-run equilibrium level of prices, output is below potential output.

If aggregate demand increases to AD2, in the short run, both real GDP and the price level rise. If aggregate demand decreases to AD3, in the short run, both real GDP and the price level fall. ... This occurs at the intersection of AD 1 with the long-run aggregate supply curve at point B.

Same

Junaid answered 2 years ago

Suppose an economy experiences an increase in exports. a) Show graphically using AD-AS model how the price level and output are affected in the long-run.

Suppose an economy experiences an increase in exports. a) Show graphically using AD-AS model how the price level and output are affected in the long-run. b) Can the government use monetary policy to offset the effects on price level and output, explain.

The simple Keynesian model (SKM) implies that the government can boost GDP in the short-run by raising planned expenditure (E) on "G" since output (Y) must equal E = C+I+G.

PROBLEM: The simple Keynesian model (SKM) implies that the government can boost GDP in the short-run by raising planned expenditure (E) on "G" since output (Y) must equal E = C+I+G. Keynes recognised that additionalE from any sources would increase the demand for money. Consequently, he had a separate money market to show how a fiscal expansion would increase the interest rate. A theoretical problem arises if we also allow the negative feedback from a higher interest rate (r) on...

Question

Consider a hypothetical country in which, initially, real GDP equals potential GDP. Suppose that the government purchases increase. All else equal (with regard to the AD-IA model), relative to the short-run level, in the medium run, output is

Solutions

Expert Solution

Related Solutions

Suppose an economy experiences an increase in exports. a) Show graphically using AD-AS model how the price level and output are affected in the long-run.

The simple Keynesian model (SKM) implies that the government can boost GDP in the short-run by raising planned expenditure (E) on "G" since output (Y) must equal E = C+I+G.