Assume a new bill is passed that increases government expenditures by $1 trillion. A) On a graph, use the traditional IS
Posted: Sun Jul 03, 2022 3:42 pm
Assume a new bill is passed that increases governmentexpenditures by $1 trillion.
A) On a graph, use the traditional IS-LM model to analyze howthe economy would respond in the short-run and the long-run inresponse to the increase in government spending. What happens inthe short-run and the long-run to output, the real interest rateand the aggregate price level? (10pts)
B) On a graph, re-analyze the short-run and long-run response ofthe economy using classical assumptions. Explain why the classicaltheory of expansionary fiscal policy differs from the traditionaltheory in part A. (10pts)
Expert Answer
A) On a graph, use the traditional IS-LM model to analyze howthe economy would respond in the short-run and the long-run inresponse to the increase in government spending. What happens inthe short-run and the long-run to output, the real interest rateand the aggregate price level? (10pts)
B) On a graph, re-analyze the short-run and long-run response ofthe economy using classical assumptions. Explain why the classicaltheory of expansionary fiscal policy differs from the traditionaltheory in part A. (10pts)
Expert Answer