Question

5. For each of the following, forecast how prices and output will change by drawing an AD-AS graph, and explain your answers using the three-step recipe to forecast macroeconomic outcomes. a. The Fed decreases interest rates amid concerns of a looming recession. b. The latest data on consumer confidence indicate that consumers have become pessimistic about the future of the economy and are therefore spending less. c. Innovations in solar cell technology cause energy prices to decline across the country. d. The federal government passes a new bill that dra- matically increases government spending on edu- cation and the military. e. The Mexican government eliminates the tariffs it charges on goods exported from the United States. f. Top executives report that they're quite uncertain about the future, as trade deals with the country's largest trading partners are being renegotiated and remain in flux. g. Automation by the largest shipping and transpor- tation companies have significantly decreased the transportation costs for businesses across the country.

Answer 1

Parce CT + Iata TAO Te Output Асе "Apact Itatan a. Output O, O, 2, Output

Parce CT + Iata TAO Te Output Асе "Apact Itatan a. Output O, O, 2, Output

Page - ADIC+I+G1+n नम्नानना a. Output

It is known that the aggregate demand function is made up of 4 major components, these components are consumption, investment, government spending, and net exports. (for questions a., b., and c. refer to the first image, and for question d. refer to the second image).

a.) If the fed decreases the interest rates, it would correspond to an implementation of the expansionary monetary policy. This means a drop in the interest rates would lead to an increase in interest-sensitive consumption and investment. This would cause the investment and consumption component of the AD to increase and cause the AD curve to shift to the right. This rightward shift would mean that the quantity of gross output increases and the price level also rise.  

b.) If there is a pessimistic or bearish sentiment in the market and the consumers are expected to spend less, the consumption component of the AD would decreases, and this would lead to lower investments as consumption falls. This would lead to a fall in AD, and the AD curve would shift leftwards. As the AD shifts to the left the price level declines and the quantity of gross output also falls.  

c.) Any innovation that aids in increasing the productive potential of the economy will cause the aggregate supply curve to shift to the right. This will cause the prices to fall and the quantity of gross output to increase.

d.) An increase in government spending will cause the government spending component of the AD function to increase (Expansionary Fiscal Policy). Through its positively linear relationship, this would cause the AD to increase and shift to the right, which will lead to the price levels to rise and the gross output to expand.