Question

In: Economics

Changes in the determinants of AD affect market outcomes. Be aware that the term "market outcomes"...

Changes in the determinants of AD affect market outcomes. Be aware that the term "market outcomes" can mean different things.

What are the options open to the federal government to affect market outcomes?

GDP Gap Vs AD Shortfall

            Describe a situation where fiscal stimulus would leave the economy short/beyond

of the full-employment rate of output.

Explain why equal shifts in the AD curve have different affects on price and output.

            What are the implications to policy makers?

Tax cut Vs Government Spending

Solutions

Expert Solution

Changes in AD are likely to affect the market outcomes. This is possible because any changes in AD wil bring the disequilibrium in economy. Now, in order to maintain stability the government intervention is required.

Government can either adjust AD or adjust AS to bring back economy to the equilibrium path. But every step of this federal government is been looked and chased by various effects of the policy implemented so far. So,the government is expected to look into various policy measures and their followed consequences before implementation of any policy such that there is no market outcomes getting affected.

The term stimulus refers to the external factors that affects the economy. So,fiscal stimulus may refer to the disturbance in fiscal market that brings disequilibrium in the concerned economy. In a situation where government levies taxes on domestic producer and provides subsidy on imports,thus leading to a shortfall in AS and bringing disequilibrium to the market by causing shortfall in employment level (because any decline in AS is followed with a decline in production activities,thus causing unemployment).

The equal shift in AD is followed with a different effect on price and output because of the elasticity of the AS and AD curve.


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