The economy of Moneyland has an actual unemployment rate below …

Advanced Placement (AP) Questions
Short Answer
Step by Step Solution
Advanced Placement (AP) Questions

The economy of Moneyland has an actual unemployment rate below the natural unemployment rate. (a) Draw a correctly labeled graph showing long-run aggregate supply, short-run aggregate supply, and aggregate demand curves. Indicate the following: (i) Current price level (labeled PL1) (ii) Current real output (labeled Y1) (iii) Full-employment output (labeled YF) (b) If investment spending on plant and equipment increases, illustrate the effect on the equilibrium price level and real output in the short run on your graph from part (a). (c) What fiscal policy action can the government of Moneyland take to restore full employment? (d) If the government of Moneyland does not implement any policy actions, will short-run aggregate supply increase, decrease, or remain the same in the long run? Explain.

Short Answer

The economic analysis emphasizes understanding key metrics such as current price level, real output, and full-employment output. Increased investment spending shifts aggregate demand right, leading to higher prices and output, while expansionary fiscal policies like increased government spending and tax reductions can further stimulate economic activity.

Step-by-Step Solution

Step 1: Understand Key Metrics

In an economic context, it’s essential to grasp the key metrics affecting the market. These include:

  • PL1 – Represents the current price level.
  • Y1 – Indicates the current real output.
  • YF – Stands for full-employment output.

Each of these metrics plays a crucial role in determining the overall health of the economy.

Step 2: Effects of Increased Investment Spending

When investment spending increases, it causes the aggregate demand (AD) to shift to the right. This shift results in:

  • A higher equilibrium price level (PL).
  • An increase in real output (Y) in the short run.

This initial response is vital in understanding how investment can stimulate economic activity.

Step 3: Implementing Fiscal Policies

To enhance economic performance, Moneyland can enact expansionary fiscal policies. This includes:

  • Increasing government spending to inject more money into the economy.
  • Reducing taxes to increase disposable income for consumers.

Without these policy interventions, the short-run aggregate supply (SRAS) will remain unchanged in the long run, as it’s influenced by factors like labor and technology.

Related Concepts

Key Metrics

Defining economic indicators that impact the overall health of the economy, such as current price level, real output, and full-employment output

Investment Spending

Financial expenditure on capital goods intended to improve or increase economic productivity, which shifts aggregate demand

Fiscal Policy

Government strategies aimed at influencing economic performance through alterations in spending and tax rates to manage economic conditions.

Table Of Contents
  1. The economy of Moneyland has an actual unemployment rate below the natural unemployment rate. (a) Draw a correctly labeled graph showing long-run aggregate supply, short-run aggregate supply, and aggregate demand curves. Indicate the following: (i) Current price level (labeled PL1) (ii) Current real output (labeled Y1) (iii) Full-employment output (labeled YF) (b) If investment spending on plant and equipment increases, illustrate the effect on the equilibrium price level and real output in the short run on your graph from part (a). (c) What fiscal policy action can the government of Moneyland take to restore full employment? (d) If the government of Moneyland does not implement any policy actions, will short-run aggregate supply increase, decrease, or remain the same in the long run? Explain.

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