5. (Fiscal Policy) Suppose there is a negative shock in consumption in the US. a. Start...

 

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5. (Fiscal Policy) Suppose there is a negative shock in consumption in the US. a. Start with an AD-IA diagram without any government intervention. Please show both in your diagram and in words what would be the short-run, medium-run and long-run changes in real GDP and inflation. b. Now suppose the government is thinking of increasing government purchases to offset the drop in aggregate demand and boost the economy. Please draw a new AD-IA diagram to show the effect of this fiscal policy and state in words how real GDP would change differently compared to a). c. Suppose the new government purchases bill takes a year to be passed in Congress. How would you predict actual changes in real GDP? Again, please draw a new AD-IA diagram to show the effect of this fiscal policy and state in words how would real GDP change differently compared to a). I d. Based on your answer from b) and c), what is the difficulty in implementing fiscal policy? e. Apart from d), are there any other critiques of fiscal policy? 5. (Fiscal Policy) Suppose there is a negative shock in consumption in the US. a. Start with an AD-IA diagram without any government intervention. Please show both in your diagram and in words what would be the short-run, medium-run and long-run changes in real GDP and inflation. b. Now suppose the government is thinking of increasing government purchases to offset the drop in aggregate demand and boost the economy. Please draw a new AD-IA diagram to show the effect of this fiscal policy and state in words how real GDP would change differently compared to a). c. Suppose the new government purchases bill takes a year to be passed in Congress. How would you predict actual changes in real GDP? Again, please draw a new AD-IA diagram to show the effect of this fiscal policy and state in words how would real GDP change differently compared to a). I d. Based on your answer from b) and c), what is the difficulty in implementing fiscal policy? e. Apart from d), are there any other critiques of fiscal policy?

Answer rating: 100% (QA)

a Without any government intervention the negative shock in consumption will decrease the aggregate demand AD curve As a result the equilibrium point ... View the full answer