Question

Some political parties consider only short run economic effects and therefore make election promises of increased government spending.

(a) Use the AD and AS diagram to explain the short run impact on economic growth and employment. [3 marks]

(b) Use a Phillips Curve diagram to explain why such policies could be damaging for the economy in the short run. [3 marks]

(c) Use the AD-AS diagram along with the long run Phillips curve diagram to comment on the long run effects of such a policy on unemployment. [4 marks]

Answer 1

a) Aggregate demand = Consumption + Government Spending + Investment + Exports - Imports

When government spending rises, Aggregate demand rises which shifts AD to AD1 while AS remains the same. This will raise the price level and output level. As more goods are produced, employment level rises.
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b) Phillips curve states that there is a negative relationship inflation and unemployment level in the economy. As employment level rises which reduce the unemployment level in the economy and raises the inflation rate in short run.
Sunday Inflation. Lichere Short Run Philips Come Unemployment Monday NO

c) In long run when Ad rises, producers tends to raise their supply to fill the consumers demand and retain maximum profit. Thus they raise Supply which shifts the supply curve to its right. This would reduce the price to its initial level and raise the output produced in the economy. In long run, Phillips curve states that unemployment rate remains constant while inflation rate keeps on changing.
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