Question

question part 3

i. Does the simple multiplier give an accurate indication of the change in equilibrium national income if the assumption on the price level is relaxed? Explain why. j Introducing the supply side of the economy to this model, explain, and graphically illustrate the effect of a negative aggregate supply shock on equilibrium. Explain every effect of such a change and the mechanism behind it. k. Consider a level of potential output that is above a typical equilibrium of this economy. If you were to advise the government on proper fiscal policy, what sort of policy would you advise? Assume that the policy you recommend is implemented by the government. Clearly and precisely explain every effect of this policy and the mechanisms that will result in a change in equilibrium real GDP in this economy. How would this policy affect the price level? Graphically show all the changes in the model. m. What happens to the ultimate impact of the policy you advise in previous part if at the same time that the policy is implemented the cost of labour increases for all firms due to exogenous reasons? Can you determine whether the effects on equilibrium real GDP or equilibrium price level are certain? If not certain, what do they depend on? Clearly explain.

Answer 1

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