Suppose the Relationship Between Real GDP and Inflation Is Depicted

question 147

Essay

Suppose the relationship between real GDP and inflation is depicted as shown in the table below.Assume that real and potential GDP are equal to each other at $5,400 billion.Suppose government purchases decline by $100 billion and the slope of the aggregate expenditure line is 0.5. (A)Explain how the AD curve is affected by this change.In the short run,what will real GDP and the rate of inflation be?
(B)Using the AD and IA curves,show what will happen in the medium run.Be sure to give an economic explanation for what is happening.
(C)Using the AD and IA curves,show what will happen in the long run.

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Definitions:

Sales Tax

A tax imposed by governments on the sale of goods and services, collected by the retailer at the point of purchase.

Sales Discount

From the seller’s perspective, a discount that a seller may offer the buyer for early payment.

FOB Shipping Point

A term used in shipping agreements indicating that the buyer is responsible for the cost and liability of goods during transportation once they are shipped.

Freight Charges

Freight Charges are costs incurred in transporting goods from one place to another, often included as part of the cost of goods sold or inventory for businesses.