Homework Answers
Answer to the question above is option a. In the short run, unemployment will increase and inflation will fall.
Reason is :-
With recession causing US net exports to fall (imports being same , exports fall) , this causes aggregate expenditure to fall in the overall US economy. This fall in aggregate expenditure will cause changes in the IS-LM curves , that is , it will lead to a leftward shift in the IS curve. With this , there will be new equilibrium level in IS-LM framework(IS shifts left , LM remains same , equilibrium output and interest rate falls). Now , with changes in the IS-LM , there will be affects on the aggregate demand of the economy. With this change , AD(aggregate demand) curve too will shift left causing output level to fall , causing increase in unemployment and along with this the equilibrium price level obtained from the Aggregate demand (AD) and Aggregate supply (AS) intersection will fall hence causing inflation to fall in short run.
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Suppose a recession in Europe reduces U.S. net exports at every price level. Which of the...
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Effect of Europe experiences a recession:
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Effect of Europe experiences a recession:
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The following graph shows the economy in long-run equilibrium at
the expected price level of 120 and the natural level of output of
$600 billion. Suppose a sudden and severe contraction in the
housing market reduces the value of homes and causes consumers to
spend less.Shift the short-run aggregate supply (AS) curve or the aggregate
demand (AD) curve to show the short-run impact of
the housing market slump.In the short run, the decrease in consumption spending
associated with the housing...
7. Those who advocate counter-cyclical fiscal policy would agree with all but one of the following statements. Which is the exception? A) Governments should be non-interventionist. B) Automatic stabilizers are not particularly effective. C) The economy is not capable of automatic self-adjustment in response the problems of unemployment and inflation. D) Counter cyclical fiscal policy is a powerful and effective tool. E) Government budget deficits are a less serious problem than income gaps. 8. Assume that the economy is in...
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