Question

In: Economics

1. Explain the impact of the weak consumer spending on output and inflation in the short-run,...

1. Explain the impact of the weak consumer spending on output and inflation in the short-run, including showing this on your AS-AD diagram.

2. Use a new diagram to help explain what happens to output and inflation in Australia in the short run when federal government introduces a fiscal stimulus package.

Solutions

Expert Solution

Hi,

Hope you are doing well!

Question:

1). Answer:

Explain the impact of the weak consumer spending on output and inflation in the short-run, including showing this on your AS-AD diagram.

When consumer spending decrease its decrease AD when AD decrease its decrease output and price level (inflation). You can see in the the economy is equilibrium at point "E" and when consumer spending decrease its decrease AD and AD curve shift left from AD to AD1. The new equilibrium price is "E1" at the point the price level and output decrease. Price and output decrease from P to P1 and Q to Q1 respectively.

Graph:

2). Answer:

Use a new diagram to help explain what happens to output and inflation in Australia in the short run when federal government introduces a fiscal stimulus package.

When the federal government introduces a fiscal stimulus package then it will increase income level that will increase AD. Increasing AD will increase output and price level (inflation). You can see in the the economy is equilibrium at point "E" and when the federal government introduces a fiscal stimulus package its increase AD and AD curve shift right from AD to AD1. The new equilibrium price is "E1" at the point the price level and output increase. Price and output increase from P to P1 and Q to Q1 respectively.

Thank You

Rahul Sunny answered 1 year ago
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