Question

Team 1: Let’s begin on the board with a graph of the long run equilibrium model of aggregate demand and aggregate supply. Next, suppose the following: the federal government, in its effort to spur on the economy and to increase output, cuts income taxes to all households. Consider the effect on consumption expenditures. Next, illustrate this change by identifying which curve is impacted, in which direction it shifts, and the short run impact on Real GDP (output) and the level of prices. What do you suppose happens to the unemployment rate?


Team 2: Let’s begin on the board with a graph of the long run equilibrium model of aggregate demand and aggregate supply. Next, suppose the following: the Federal Reserve Bank decreases the money supply by selling US Treasury Securities to the public. As a result, interest rates rise. Next, illustrate this change by identifying which curve is impacted, in which direction it shifts, and the short run impact on Real GDP (output) and the level of prices. What do you suppose happens to the unemployment rate?


Team 3: Let’s begin on the board with a graph of the long run equilibrium model of aggregate demand and aggregate supply. Next, suppose the following: the nation is in the middle of a horrendous recession. In response, the Federal Reserve increases the money supply, and thus drives down interest rates. In addition, the federal government increases Government Purchases. Next, illustrate this change by identifying which curve is impacted, in which direction it shifts, and the short run impact on Real GDP (output) and the level of prices. What do you suppose happens to the unemployment rate?

Answer 1

1) cutting the income taxes will leave more disposable income at the hands of people. Thus consumption expenditure will increase. Incentive to work and invest will also increase. These are the components of aggressive demand curve.So aggregate demand curve is effected. Aggregate demand curve will shift to right.

As a result price will increase from p to p1 and Real GDP will increase from Y to Y1

2) Interest rates are inversely related to investment. So increasing the Interest rate will reduce investment. Reducing the money supply will also reduce consumption. Investment is an important component of aggregate demand.

The curve effected is aggregate demand curve. It shifts to left. As a result, there is a decline in Price from p to p1 and real GDP from Y to Y1.

Unemployment rate will increase due to the reduction in aggregate demand.

3) Decline in interest rate will increase investment. There's also an increase in government Expenditure. Investment and government Expenditure are the components of aggregate demand.

The curve effected is aggregate demand. It shifts to right. Price increases from p to P1 and Real gdp from Y to Y1.

Unemployment rate will decline due to the Increase in aggregate demand.