Suppose the Economy Is Initially at Potential GDP

question 109

Essay

Suppose the economy is initially at potential GDP.
(A)Draw an aggregate demand curve and price adjustment line,and label the initial equilibrium with an A.
(B)Suppose government purchases increase.Illustrate the short-run effect on your diagram.Label the new equilibrium with a B.
(C)Explain the short-run effect on C,I,G,X,R,and inflation,as compared to baseline.
(D)Illustrate the long-run effect on your diagram,and label the long-run equilibrium with a C.
(E)Explain the long-run effect on C,I,G,X,R,and inflation,as compared to baseline.