Question

Module 7 Ch.17 Fiscal Policy and AD-AS Graph (4 points on each scenario) This problem is adapted and modified from Openstax Ch.17 problem 53. Review ch.11 to 13 about AS-AD, Keynesian, and Neoclassical approaches. 1. Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below, and explain why. (2 points) 2. Sketch an AD-AS diagram for each of the situations. Your graph should include the vertical potential GDP, and the aggregate demand and aggregate supply curves. Explain what happen to the price level, employment level, and output gap after the appropriate fiscal policy is used. (2 points) a. A recession. The economy is in the flat aggregate supply zone. b. A stock market collapse that hurts consumer and business confidence. C. Extremely rapid growth of exports. Currently, the economy is producing at potential GDP. d. Rising inflation. Currently, the economy is producing at the intermediate zone of the aggregate supply curve. e. A rise in oil prices. Make your own assumption of the original equilibrium.

Answer 1

ASCO agregate Demand AD- Output An in This expansionary fiscal policy like increase government expenditure is required will shift AD curve to the right and increase price arrel and reduce output gap. Bimilar diagram as in part @ A In this case fiscal policy inflation. e culpet a contractionary can help in reducing As this will shift clownis smitted the AD urna.

AS output A contractionary fiscal policy can reduce AD urve and can contain inflation. It will reduce price and increase output gap. AS - AD - Output A rise in oil prices is inflationary for the economy. In order to contain inflation a contractionary fiscal policy can be followed. However this will increase classmate output gap.