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1. Assume that there is an increase in government spending

Which determinant? ____________

D AD or D AS?

AS AD 0 Real domestic output

What happens to:

Price Level _______________

Real GDP _______________

Inflation _______________

_______________

Economic Growth _______________

2. Assume that there is an increase in taxes

Which determinant? ____________

D AD or D AS?

AS AD 0 Real domestic output

What happens to:

Price Level _______________

Real GDP _______________

Inflation _______________

_______________

Economic Growth _______________
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Homework Answers

Answer #1

1. When Government spending increases the aggregate demand rises shifting the AD curve to the right.This results in rise in price level and output/income.With the rise in output there is higher economic growth.

Determinant-AD

Price level -increases

Real GDP-increases

Inflation-rises(due to rise in price level)

Economic growth-rises

AS 2 FR- 2 AD 2 Real GDP (Y)

2.With rise in taxes the income of the consumers fall.With fall in income the aggregate demand falls shifting the AD to the left, reducing price and real GDP.

Determinant-AD

Price-Falls

Real GDP-Falls

Inflation-Falls

Economic growth-falls

AS Pt P2 AD2AD1 Real GDP (n (yen)

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