Answer Happy

Economists use the model of aggregate supply and aggregate
demand (AS-AD) to
explain short run fluctuations of GDP around its long run
trend.
i) In the context of the AS-AD model, explain which curve(s) the
following
events would shift, which way, and why:
a. The government increases their spending on health
b. Changes in immigration laws lead to an influx of workers into a
country
c. There is a change in expectations and firms expect the price
level to be
lower in the future
d. Consumer sentiment changes and they feel more optimistic about
the
economy
e. The Central Bank increases the reserve requirements and
now
commercial banks must keep higher cash reserves [30
marks]
ii) A change in consumer sentiment leads to a decrease in
consumption
spending. In the context of the AS-AD model, and with the aid of
a
diagram, explain the short run effects this has on the price level,
output,
and unemployment in the economy. [25 marks]
iii) In the scenario presented in part ii) outline and explain how
the
government could use fiscal policy to try to return the economy to
its
natural rate of output. If policy makers did not intervene in this
economy,
what would happen in the long run? [25
marks]
iv) Imagine there are two countries that are identical, except for
their marginal
propensities to consume (MPC). They both experience the same
decrease
in consumption spending described in part ii). Country A has a
MPC=0.9
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and Country B has a MPC=0.6. If both governments implement the
same
fiscal policy response will the effects be the same? Why/ why
not?
[20 mark