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Chapter 11: Q. 9 (page 291)

A policymaker claims that tax cuts led the economy out of a recession. Can we use the AD/AS diagram to show this?

Short Answer

Expert verified

Depending on where the tax cuts are focused, they enhance consumer and investment spending. This would move AD to the right, so that if tax cuts were implemented during a recession (and GDP was below potential), GDP would rise and the economy would be "led out of recession."

Step by step solution

01

concept introduction

The total quantity of products and services demanded by consumers at a given price level and period is known as aggregate demand.

The value of total production produced by an economy at a certain price level over a specific time period is known as aggregate supply.

02

To determine

The impact of the tax cut on the equilibrium level of GDP and price level is still to be determined.

03

Step 3:Explanation

A tax cut implemented by the government is one of the government's fiscal tools. Any reduction in the tax rate suggests that people have more money in their hands, increasing their spending ability. Consumption is a big component of aggregate demand, hence this will raise aggregate demand.

Only when the economy is far from its potential GDP level will it emerge from recession. An rise in the equilibrium level and price level would result from a rightward shift in the AD curve.

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Most popular questions from this chapter

Table 11.4 describes Santher's economy.

Price Level
AD
AS
501000250
60950580
70900750
80850850
90800900

a. Plot the AD/AS curves and identify the equilibrium.

b. Would you expect unemployment in this economy to be relatively high or low?

c. Would you expect prices to be a relatively large or small concern for this economy?

d. Imagine that input prices fall and so AS shifts to the right by 150units. Identify the new equilibrium. e. How will the shift in AS affect the original output, price level, and employment?

Economists expect that as the labor market continues to tighten going into the latter part of 2015 that workers should begin to expect wage increases in 2015 and 2016. Assuming this occurs and it was the only development in the labor market that year, how would this affect the AS curve? What if it was also accompanied by an increase in worker productivity?

The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table 11.3 shows.

Price Level
AD
AS
100
700
200
120
600
325
140
500
500
160
400
570
180
300
620

a. Plot the AD/AS diagram. Identify the equilibrium. b. Would you expect unemployment in this economy to be relatively high or low?

c. Would you expect concern about inflation in this economy to be relatively high or low?

d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium.

e. How will the shift in AD affect the original output, price level, and employment?

How is the natural rate of unemployment

illustrated in an AD/AS model?

On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why aggregate demand does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper?
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