Question

The graph below depicts an economy where a decline in aggregate demandes caused a recession. This economy current level of real GDP (Y) is below its long-run equilibrium, which is illustrated by the long run aggregate supply curve LRASL and price level P. below the equilibrium value of Without any fiscal policy, we expect the economy to eventually return to full employment on its own. Use the graph below to the Instructions: Use the tool provided to plot New Curve Pot only the endpoints of the ne, keeping the New Curve pere exing curve with the serveriste intersection 2 stotel Label your ne propriate Self-Correction Real GDP b. Assume the government instead enacts EIGEDEON fiscal policy to reduce the burden of the recession. Use the graph below to illustrate this process Instructions: Use the tool provided "New Curve te plot the appropriateline. Plot only the endpoints of the line 2 points total). Label yourline appropriately O Fiscal Policy Real GDP emoloyment level of output the benefit of allowing the When comparing the economy to return to options for restoring the economy to t employment on owns that the economy wil recover faster without fiscal policy ful employment is reached with a lower price level lower unemployment and higher real GDP are reaches ful employment is resched with a higher price level

Answer 1

Workers demand wage raise when price level rises.The cost of production rises when firms pay higher wages.The aggregate supply falls as a result.AS shifts to the left increasing price to P3 and reducing output to Y1.

CRAS AS I AS - Yi Y

B.In this case AD is below full employment Equilibrium.To pull the economy output of inflation the government would undertake fiscal expansion by reducing taxes and increasing spending,shift AD to the right.

When government market corrects itself full employment is reached with a higher price level.When government corrects the market it makes sure that price level is lower.However,the market recovers faster without fiscal policy because of no implementation lag.

ohh

Answer-Expansionary,first option