Question

The States and Balanced Budgets. The accompanying figure shows the initial aggregate demand and aggregate supply curves for the US Suppose the national economy experiences a recession, 1) Using the line drawing tool, show the effect of the recession by appropriately shitting the ADAS Curves. Label the new curve(s) AD, and AS, as appropriate 2) Using the point drawing tool, label the new equilibrium F Unlike the U.S.federal government, virtually all states have requirements that they must either plan for or maintain a balanced budget. 3) Using the line drawing tool, show the impact on the national economy of the actions taken by the states to balance their budgets when the national economy experiences a recession. Appropriately shit the AD-A curves and label the shifted curve(s) AD, and AS, as needed 4.) Using the point drawing tool, label the new equilibrium G

Answer 1

LRAS Price level AS1 L--- G pil---------- P2-------AF P3---- G ! ADI TAD31 AD2 Y3 Y2Y1 GDP 1. If the aggregate demand is less than the aggregate supply of GDP at fullemployment, the situation is recession. The recession is caused by the fall in aggregate demand. The aggregate demand shift leftward from AD1 to AD2. 2. The new shortrun equilibrium is reached at point 'F' with GDP Y2 and price level P2. The actual GDP fall short of potential GDP. 3. For the promotion of fullemployment and economic growth every economy is expected to increase government spending. The budget will be a deficit budget when the government undertakes increased public expenditure. The requirements of states to maintain a balanced budget reduce the volume of government expenditure which shifts the aggregate demand curve to leftward further. The AD curve shift from AD2 to AD3. 4. In shortrun the economy reaches a new equilibrium at 'G' with lower output Y3 and price level P3.