Question

Assume that the United States economy is currently in a recession in a short-run equilibrium. (a) Draw a correctly labeled graph of the short-run and long-run Phillips curves. Use the letter A lo label il point that could represent the current state of the economy in recession. (b) Draw a correctly labeled graph of aggregate demand and aggregate supply in the recession and show cach of the following. (i) The long-run equilibrium output, labeled Y (11) The current equilibrium output and price levels, labeled Y. and PL, respectively (c) To balance the federal budget, suppose that the government decides to raise income taxes while maintaining the current level of government spending. On the graph drawn in part (b), show the effect of the increase in taxes. Label the new equilibrium output and price levels Y, and PL, respectively.

Answer 1

The solution of this problem would be.......

A RAS. (Long ups cuines level ISRAS (Short run Phillip's curve) If Real GDP.

IRAS I SRAS PLE ADI le < 4f NGOP LRAS SRAS A - Long run Phillip's curre Short- run ulu Current point of equilibrium (in the state of recession) 6 when taxes are increased, disposable income for consumers falls, thus, consumption falls. & AD falls, shifts to the This, prices fall and real GDP from Pre to PL2 falls from Ye