Question

urves. Where on the short-run AS curve was Japan in 2000 8 By using aggregate supply and aggregate demand curves to iutratyour points, discuss the impacts of the following events on the price level and on equilibrium GDP () in the short run: d. An increase in the money supply with the economy operating at near full capacity A de crease in taxes and an increase in government spendi ng supported by a cooperative Fed acting to keep output from rising

Answer 1

Answer. a) An increase in the money supply affects the aggregate demand in the economy. Aggregate demand curve gets shift rightward. Hence General Price level will increase in the economy. Since Economy is in full capacity level, then further production is not possible. In Short run there will be increase in the Price level. In the long run demand will shrink as price level is higher in the economy. We can see this on the below graph. Y* is showing the full capacity level of output. E₀ is the short run equilibrium with higher price level.

b) Decrease in the taxes and increase in the government spending work in the same direction. They result in the shift in the Aggregate demand curve rightward. This ends with the higher price level and higher output level as well from Y₀ to Y₁ in the figure. New equilibrium in the economy goes from E₀ to E₁.