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Chapter 27: Problem 6

An article in the Wall Street Journal stated that "Japan's cabinet approved a government stimulus package that includes \(¥ 7.5\) trillion (\$73 billion) in new spending, in the latest effort by Prime Minister Shinzo Abe to jump-start the nation's sluggish economy." a. Draw an aggregate demand and aggregate supply graph that shows where the Japanese government expects the economy to be without the stimulus package. Briefly explain what you graph shows. b. In the same graph, show the effect of the stimulus package on the economy. Briefly explain what your graphs shows.

Short Answer

Expert verified
The initial AD and AS graph indicates Japan's economy before the stimulus, at equilibrium E0. Post-stimulus, the AD curve shifts to the right (AD1) indicating increased demand, with a new equilibrium E1. This shift represents expected economic growth due to the stimulus package.

Step by step solution

01

Draw the initial Aggregate Demand (AD) and Aggregate Supply (AS) graph

Draw a graph with 'Price level' on the y-axis, and 'Real GDP' on the x-axis. The initial Aggregate Demand curve (AD0) and the Aggregate Supply curve (AS) intersect at the equilibrium point E0. This illustrates the current economic condition before the government stimulus was introduced.
02

Map effect of stimulus package

Government expenditures are a component of Aggregate Demand. The stimulus package worth \(¥ 7.5\) trillion would increase the Aggregate Demand. Hence, draw a new Aggregate Demand curve (AD1) to the right of the initial one. The new equilibrium, E1, is where AD1 intersects the AS curve.
03

Interpretation of the graph

The shift in the Aggregate Demand curve from AD0 to AD1 depicts an increase in demand for goods and services, due to the government stimulus package, leading to a higher equilibrium of Price level and Real GDP. This represents an expected economic growth after the stimulus.

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