Question

QUESTION 6
Some political parties consider only short run economic effects and therefore make election promises of increased government spending.
(a) Use the AD and AS diagram to explain the short run impact on economic growth and employment. [3 marks]

(b) Use a Phillips Curve diagram to explain why such policies could be damaging for the economy in the short run. [3 marks]

(c) Use the AD-AS diagram along with the long run Phillips curve diagram to comment on the long run effects of such a policy on unemployment. [4 marks]

Answer 1

a) As, Aggregate demand = Consumption + Government Spending + Private Investment + Exports - Imports

When government spending rises, there is more flow of money in the market which raises the consumers willingness to pay for a good and raising aggregate demand which shifts AD to AD1 while AS remains the same. This will raise the price level from P to P1 and output level from Y to Y1. As more goods are produced, producer needs more labor which raises employment level.
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b) Phillips curve states that there is a negative relationship inflation and unemployment level in the economy. As unemployment level falls due to more goods produced, inflation rises which cause prices of consumer good rising whose negative effect fall on poor people.
Sunday Inflation. Lichere Short Run Philips Come Unemployment Monday NO

c) In long run when AD rises, producers tends to raise their supply to fill the consumers demand and retain maximum profit. Thus they raise supply which shifts the supply curve to its right. from S to S1. This would reduce the price to its initial level of P and raise the output produced in the economy to level Q2. In long run, Phillips curve states that unemployment rate remains constant while inflation rate keeps on changing.
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