Suppose the following graph is the current condition of the U.S. economy. Answer the following questions...

Suppose the following graph is the current condition of the U.S. economy.

Answer the following questions based on this graph.

(10 points) Based on the graph, what type of gap is the U.S. economy experiencing?
(40 points) From the Keynesian View—
a. Is the issue on the demand or supply side of the economy?
b. What government actions would be recommended?
c. According to the Phillips curve, what would happen to the price level if we pursue policies to lower unemployment?
d. What did Keynes mean by “sticky prices”?
(30 points) From the Neoclassical View—
a. What change needs to happen in our graph to bring the U.S. economy back to potential output?
b. How will this happen?
c. Would this lead to more or less inflation that the Keynesian actions?
(10 points) From 2007-2009 the US experienced one of its worst economic collapses. Which approach did the U.S. government follow in regards to the economy—Keynesian or Neoclassical?
(10 points) In Spring 2020, the U.S. economy once again found itself in an economic crisis, this time due to the COVID-19 pandemic. Which approach did the U.S. government follow in regards to the economy—Keynesian or Neoclassical?

Solutions

Expert Solution

Answer 1:

Given the current condition of the US economy it can be stated that the economy is experiencing Recessionary gap because actutal level of GDP in the economy is below the potential level of GDP given the current market conditions.

a. According to Keynesian view, this is a demand dide issue for the economy.

b. To eliminate the recessionary gap in the economy, it is advisable for the government to follow expansionary fiscal policy which involves increasing the level of government expenditure and reducing tax rate which will shift aggregate demand rightwards and helps in eliminating recessionary gap in the economy.

c. Since there exists negative relationship between unemployment rate and price level according to Phillips Curve, the policies to pursue lower unemployment level will increase the level of inflation in the economy.

d. When prices do not change easily because it takes time for expenctations of people to adjust, this is known as Sticky prices.

Rahul Sunny answered 1 year ago

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