Question

Aggregate Demand AD = $425 (2) Maximum Output Y = $385
The average citizen will spend 80 cents for every $1 of gained income.
The economy is currently at equilibrium.
A) Aggregate Supply AS = ? (amount) Why?
B) What condition exists?
C) Corrective government spending = ? (amount)
D) Graph fully using the expenditures Approach.
E) Corrective tax policy = ? (amount)
F) Graph fully using the Leakages-Injections Approach.
G) Draw the chain diagram showing all the links in the process in part (E)
Your research also shows that a change in Money Supply Ms of $2B will change
interest rate i by 2% AND a change in interest rate i of 2% will change
Investment I by $4B.
H) Correct the problem using Monetary Policy MP.
I) Draw the chain diagram all the links in this MP process.
J) Given a Reserve Ratio rr = .10, what Fed Open Markets Operation corrects
the problem.

Answer 1

Sol :

Aggregate demand = $425

Income = $385

1) Aggregate supply is equal to Income = $385

because , income is arises from the sale of ouput and the same is shown by the aggregte supply curve ( sum total of goods and services that the produces wants to supply during the particular period of time )

2) Economy is at Overemployment of resources which will create a gap of INFLATION in the economy.

because, AD > AS

3) Corrective government spending : Government spending must be decreases by the excess amount of AD over AS (i.e $425 - $385 = $40 ) . in order to reach at the equilibrium level , government spending must be decreases by $40 .

4) Diagram is as follows :