Suppose real output is initially at its full employment level. Using Aggregate Demand (AD)—Aggregate Supply (AS) framework, discuss the short-run and long-run effects of a decrease in government expe...
- Suppose real output is initially at its full employment level.
Using Aggregate Demand (AD)—Aggregate Supply (AS) framework,
discuss the short-run and long-run effects of a decrease in
government expenditure on the price level, real output, nominal
wage rate and real wage rate under the following three alternative
assumptions:
- nominal wages are fully flexible
- nominal wages are relatively slow to adjust
- nominal wages are completely rigid.
Homework Answers
When expenditure decreases,supply of money in the market decreases and vice-versa both in short run as well as long run.So people will have less money to spend as AD will decreases in comparison to AS.and price of goods will rise.
Due to decreased government expenditure in the short run there will no effect on the real output but in the long run the real output will decrease.there will be also decrease in the nominal wage rate in the short run and in the long run but there will be no effect on real wage rate in the short run but real wage rate will increase in long run .
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Suppose real output is initially at its full employment level. Using Aggregate Demand (AD)—Aggregate Supply (AS) framework, discuss the short-run and long-run effects of a decrease in government expe...
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