1. (20 points) a) Using the AS-AD model, graphically illustrate and describe in words what happens to the long- run and

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1 20 Points A Using The As Ad Model Graphically Illustrate And Describe In Words What Happens To The Long Run And 1 (73.41 KiB) Viewed 40 times

1. (20 points) a) Using the AS-AD model, graphically illustrate and describe in words what happens to the long- run and short-run equilibrium level of aggregate output and inflation, when the economy is hit by a negative demand shock and the fiscal policy responds to the shock. Make sure you properly label all the axes and curves. Be specific to describe how the fiscal policy can act in this case. b) Describe the government spending multiplier and how it would affect the fiscal policy response above in part (a). c) Now, suppose the economy is at the zero lower bound and output is below potential due to a negative demand shock. Explain in words and using the AS-AD model why in this case the fiscal policy impact would be likely bigger and more helpful for the economy?