Suppose the Economy Is in a Boom and Spending Is

question 76

Essay

Suppose the economy is in a boom and spending is thought to be $75 billion above potential GDP.Suppose Congress decides to reduce military spending in an attempt to stabilize the economy.
(A)Show the situation using the aggregate demand curve and the IA line.
(B)What happens to the inflation rate and the interest rate?
(C)According to the long-run growth model in Chapter 19 in your text,what effect would this policy have on economic growth?

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Definitions:

Direct Materials Price Variance

Direct materials price variance is the difference between the actual cost of materials and the standard cost, multiplied by the quantity of materials purchased.

Standard Price

A predetermined cost that management expects to pay under normal conditions for a specific quantity of goods or services.

Unfavorable Staff Time Variance

A discrepancy where the actual hours worked by employees exceed the planned or standard hours, typically leading to higher costs.

Insufficient Staff Training

A situation where employees lack the necessary skills and knowledge to perform their job effectively.