AB 204 All Assignments AB 204 All Assignments | Page 13

macroeconomic-fluctuations-and-macroeconomic-
equilibrium
1. Refer to the sets of the aggregate demand, short-run aggregate
supply, and long-run aggregate supply curves. Use the graphs to explain
the process and steps by which each of the following economic
scenarios will shift the economy from one long-run macroeconomic
equilibrium to another equilibrium. Under each scenario, elaborate the
short-run and long-run effects of the shifts in the aggregate demand
and aggregate supply curves on the aggregate price level and aggregate
output (real GDP).
Suppose the household wealth decreases due to a decline in the stock
market asset prices (See the set of graphs below and pay attention to
the 3-stage shifts in graphs).
Assume the government lowers taxes, which increases the household’s
disposable income. However, the government purchases (spending)
remains the same. (See the set of graphs below and shifts in graphs)
2. Suppose the economy of a hypothetical country has reached its long-
run macroeconomic equilibrium when each of the following aggregate
demand shocks occurs. What kind of gap, inflationary or recessionary
gap, will the economy face after the AD shock indicated by the shift in
AD curves? What types of fiscal policy instruments will help move the
economy back to the potential level of output (real GDP)? Give specific
examples.