EXPLAIN what happens in the short- and long-run in the Aggregate Demand and Supply model when the following events occur.
Requirements: Enough
Question ONE
(12 points) Using a graph to illustrate, EXPLAIN what happens in the short- and long-run in the Aggregate Demand and Supply model when the following events occur. Note: you should use a separate graph for each event. Make sure to reference your graph in your explanation. LABEL all curves, axes, and equilibriums!
The U.S. economy is already in a recession. The government passes a stimulus package to increase government spending.
The U.S. economy is operating at full employment. The government passes a bill that cuts taxes for corporations.
The U.S. economy is operating above full employment. To combat inflation, the government raises taxes.
The U.S. economy is already in a recession. Due to budgetary constraints, no fiscal policy action is taken by the government.
Question Two
(8 points) Assume a marginal propensity to consume of 0.7. Calculate the following. SHOW YOUR WORK.
What is the spending multiplier?
What is the tax multiplier?
Explain in your own words why the tax multiplier is always smaller than the government spending multiplier.
Explain in your own words why the balanced budget multiplier is always equal to 1. Use a numerical example and your answers from parts a and b in your explanation.
Question Three
(4 points) List and explain the timing lags associated with fiscal policy.
Question Four
(6 points) Answer the following discussion questions in your own words.
What are the trade-offs associated with using demand-side and supply-side fiscal policy?
Why does the U.S. not annually balance its budget? Discuss fully.
What issues arise with cyclically balanced budgets? Discuss fully.
Question Five
Read the following article by Investopedia discussing the U.S. fiscal policy response to the COVID-19 pandemic and recession.
(Note: only the section on fiscal policy).
Discuss in your own words whether you believe the U.S. provided an adequate amount of expansionary fiscal policy during the COVID-19 pandemic. In your submission, be sure to summarize the policies enacted and their effect on the economy.
Discussion should be 250 – 600 words.
A well-reasoned response will address the following questions:
Did the U.S. provide enough expansionary fiscal policy? Was it too much or too little?
Hindsight is 20/20. If you could go back in time, would you suggest a different course of action?
Supply citations for any article cited or referenced in your post.
**If you cite a statistic, it MUST be attached to a reference.**
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