Question

QUESTION THREE [25]
3.1 Distinguish between the short-run aggregate supply curve (SRAS) and long-run aggregate
supply curve (LRAS). Motivate your answer with the aid of diagrams. (10)
3.2 List and discuss any three (3) problems associated with using gross domestic product (GDP)
as a measure of economic growth. (9)
3.3 List and describe the two (2) tools of fiscal policy. (6)

Answer 1

A.In the short run the supply curve is the rising portion of the MC curve.

The long run supply curve is vertical at full employment level of output.This is because resources are fixed and cannot be increased in the long run .

Long run Short run aggregate supply aggregate supply Price level Aggregate demand Output or Income

3.2 Problem with GDP as a measure of economic growth.

1.GDP does not reflect on inequality.A nation with high inequality can have high GDP.

2.It does not take into account the underground economy which underestimates GDP.

3.It does not consider welfare indicators such as health,education etc.

3.3 Two tools of fiscal policy are-

A.Taxation-The government can change the tax rate according to the condition of the economy

B.Government spending-it includes transfer payments, unemployment benefits etc.