Question

The graph shows an economy below full employment Te resare hll employmen,the goverrment Increase. goment exponditure by S0 5 tilion. Draw a curve to shom The incsease in gevemment espenditune sets of a mulipliar process Dra a cuve that shows the multiplier effect that returns the economy to full employment change in spending plans, Labeli the curve AD, AE Label AD Drw a point at the bul employmem equilbim Choose the cornect statement 0 A. An equal norease inuwenmet expendhire and taxes cannot move the economy back to ful employment О 8. real GOP is below palential GDP. ierelneary 1hcal poicy oan be used n an atmpt to restore ful employment O C. A deorease in taxes wil increase aggregate demand, but becaese he lax multiplies is smaller than the government expendture mutiplier, the econoty wil oot rehum to petential GDP O D. t roal GDe is bolow potentiai GOP, the goverment can use eihet dscretionary or automatic fscal policy in an attempt to restore full employment Cck he grah,chose a tool in the pal ete and eae your graph

Answer 1

As shown in the graph above and as given, the AD curve shows the original supply of government expenditure and the AS curve shows the responsiveness of the market supply in response to the expenditure f the government. The point P at which these two curves intersect the point of equilibrium. After the Government has now injected a fresh $ 0.5 trillion, the new supply of expenditure curve is shown by the curve AD2+E , and the AD1 curve shows the corresponding supply or responsiveness from the market forces. Therefore, a new equilibrium point Q is now achieved.

When an economy is facing the issue of less employment, it the Government that can inject a substantial amount of money as expenditures to boost the older firms to increase their production, thereby requiring new laborers and thus generating employment. More Government expenditure also means that new firm would be attracted toward the market and this will also raise the chances of more employment generation. However, this process of generation of employment is not a sudden process and required a substantial amount of time. As in the case here, the government expenditure of $ 0.5 trillion may not directly and quickly result in the generation of employment or the reduction of unemployment. This will take some time for the economy to cope up with the excess availability of funds and to allocate accordingly to the concerned resources in an adequate manner. Thus, we can sum up saying that, the injection of huge amount of expenditure by the government will bring about the scenario if full employment, but this will require a substantial amount of time and it will only happen in the long run. Therefore, the correct answer will be : (c) A decrease in taxes will increase the demand, but because the tax multiplier is smaller than the Government expenditure multiplier, the economy will not return to potential GDP.