As shown in the graph above and as given, the AD curve shows the original supply of government expenditure and the AS curve shows the responsiveness of the market supply in response to the expenditure f the government. The point P at which these two curves intersect the point of equilibrium. After the Government has now injected a fresh $ 0.5 trillion, the new supply of expenditure curve is shown by the curve AD2+E , and the AD1 curve shows the corresponding supply or responsiveness from the market forces. Therefore, a new equilibrium point Q is now achieved.
When an economy is facing the issue of less employment, it the Government that can inject a substantial amount of money as expenditures to boost the older firms to increase their production, thereby requiring new laborers and thus generating employment. More Government expenditure also means that new firm would be attracted toward the market and this will also raise the chances of more employment generation. However, this process of generation of employment is not a sudden process and required a substantial amount of time. As in the case here, the government expenditure of $ 0.5 trillion may not directly and quickly result in the generation of employment or the reduction of unemployment. This will take some time for the economy to cope up with the excess availability of funds and to allocate accordingly to the concerned resources in an adequate manner. Thus, we can sum up saying that, the injection of huge amount of expenditure by the government will bring about the scenario if full employment, but this will require a substantial amount of time and it will only happen in the long run. Therefore, the correct answer will be : (c) A decrease in taxes will increase the demand, but because the tax multiplier is smaller than the Government expenditure multiplier, the economy will not return to potential GDP.
The graph shows an economy below full employment Te resare hll employmen,the goverrment Increase. goment exponditure...
The graph shows an economy below full employment. To restore full employment, the government increases government expenditure by $0.5 trillion. Draw a curve to show the effect of the increase if it is the only change in spending plans. Label the curve ADo AE Price level (GDP price index, 2009-100) Potential GDP The increase in government expenditure sets off a multiplier process. Draw a curve that shows the multiplier effect that returns the economy to full employment. Label it AD,...
The graph shows an economy that is above full employment. To restore full employment, the government decreases government expenditure by $0.5 trillion. Draw a curve to show the effect of the decrease if this is the only change in spending plans. Label the curve AD0-ΔE The decrease in government expenditure sets off a multiplier process. Draw a curve that shows the multiplier effect that returns the economy to full employment. Label it AD Draw a point at the full-employment equilibrium...
The graph shows the economy in long-run equilibrium Then the world economy expands and the demand for U.S.-produced goods increases Price level (GDP deflator, 2009-100) 14 Draw a curve that shows 1) the effect of increased demand for U.S.-produced goods. Label it 1 2) the effect of a rising money wage rate that returns the economy to full employment. Label it 2. Draw a point at the new long-run equilibrium 13 SAS 12 An economy is in a long-run equilibrium....
This Question: 1 pt 11 of 30 This In the graph on the right the economy is in long-run equilibrium at point A Now, assume that there is an unexpected increase in the price of oil. 1) Use the line drawing tool to show the resulting short-run equilibrium on your diagram. Label any new aggregate demand or aggregate supply curve as AD, SRAS, LRAS, p riate 2.) Use the point drawing tool to locate the new short run equilibrium point...
Suppose that the economy of Witland in the figure below is at full-employment equilibrium and the present nominal wage rate is $22 per hour. Round your answers to two decimal places. a. The real wage rate (in base year prices) is $ . b. Suppose that aggregate demand increases by $400. Draw the new AD curve in the graph above. Plot only the endpoints of the curve. c. At the new equilibrium real GDP level, the value of the real wage rate will be...