Question

The House of Representatives and the White House are both working on a second coronavirus relief bill. Below is a paragraph from WSJ describing the bill passed by the House on October 1^st. What are at least three factors that would affect the AS-AD graph, and briefly discuss how?

"The Democratic bill would give money to state and local governments, send another round of stimulus checks to many Americans, reinstate a $600 weekly supplement to unemployment benefits, and give assistance to airlines, restaurants and performance venues, among other measures. Republicans have panned the bill, giving it no chance of passage in the GOP-controlled Senate."

Answer 1

The bill is an example of stimulatory measures being taken by the government to increase the overall level of output in the economy which can help in overcoming recession in the economy. This is because the bill can help increasing the actual level of output in the economy closer to the potential level of output in the economy. The following factors are impacted by the above bill in the AD-AS model:

1. Increase in Governmet Expenditure. The bill will give the money to the state and local governments which will increase overall level of government expenditure in the economy. Since Government expenditure is one of the components of aggregate demand in the economy, this will increase the level of aggregate demand in the economy.

2. Increase in Consumption Expenditure. Provision of unemployment benefits to people will increase income in the hands of unemployed which increases their disposable income. As disposable income of the consumers increases, this increases consumption expenditure in the economy. As the level of consumption expenditure in the economy increases, the level of aggregate demand will also increase.

3. Increase in Aggregate Supply; Assistance to airlines, restaurants and performance venues, will reduce the cost of production in the economy because of provision of subsidies to various producers. This reduces cost of production and shifts the aggrgate supply curve righwards .

The impact of the changes can be depicted graphically as: