Question

Figure 1 Figure 2 So DI Do ото Figure 3 Figure 4 So Do Do Q' Q

Answer 1

a.) Figure 8. Removal of tax benefits is a fiscal policy measure to reduce the economic activity in case of a heating economy which reduces the aggregate demand(D0-D1). Also, it increases the production cost for the suppliers so, leads to a decrease in aggregate supply also (S0- S1).

Since the interest rate rise due to shifts in aggregate demand and aggregate supply curves, it leads to a reduction in investment.

Since the aggregate demand decreases and considering it is a full employment situation, the productivity of the workers also decreases.

The rise in interest rates and an outlook of fall in real GDP leads to more savings

b.) Figure 2. Reduction of expenditure by government is a fiscal policy measure to reduce the economic activity in case of a heating economy which reduces the aggregate demand(D0-D1)

Since the interest rate falls due to shifts in aggregate demand, it leads to an increase in investment.

Since the interest rate falls, consumption increases (Savings falls).

The fall in real GDP is a short term phenomenon. In long term, the Aggregate Supply will also fall by decreasing input costs or workers productivity so as to reach an equilibrium and erase the short term decline in real GDP.

c.) Figure 2. Weak expectations from the future lead to decreased investments and thus reduces the aggregate demand(D0-D1)

Interest rate falls, at the same time the business confidence (expectations from future) are weak, so people resort to savings

The fall in real GDP is a short term phenomenon. In long term, the Aggregate Supply will also fall by decreasing input costs or workers productivity so as to reach an equilibrium and erase the short term decline in real GDP.

d.) Figure 2. Introduction of new taxes by the government is a fiscal policy measure to reduce the economic activity in case of a heating economy which reduces the aggregate demand(D0-D1)

Although the interest rate falls, the introduction of new corporate taxes leads to postponement of investment in the economy.  

Interest rate falls, at the same time the business confidence (expectations from future) are weak as taxes are raised, so people resort to savings

The fall in real GDP is a short term phenomenon. In long term, the Aggregate Supply will also fall by decreasing input costs or workers productivity so as to reach an equilibrium and erase the short term decline in real GDP.