Macroeconomics · Hard · 35 marks
EO past paper: 2023 International Final
Consider a closed economy characterized by an increasing aggregate supply curve. Suppose that the government dramatically increases its expenditures on infrastructure without simultaneously raising taxes.
(a) Utilize the Aggregate Demand/Aggregate Supply (AD/AS) model to illustrate the impact of this rise in government expenditures. (Type your answer: describe the diagram in words, naming the axes, curves, shifts and areas.) [10] marks (b) Assume that the central bank's inflation target is set at zero. Utilize the Aggregate Demand/Aggregate Supply (AD/AS) model to illustrate the increase in government expenditures, followed by the central bank's subsequent response. (Type your answer: describe the diagram in words, naming the axes, curves, shifts and areas.) [12] marks (c) Suppose once again that the government increases its expenditures, without correspondingly increasing taxes within the same period, and that individuals adhere to the Ricardian equivalence theory. Utilize the Aggregate Demand/Aggregate Supply (AD/AS) model to illustrate the rise in government expenditures, accompanied by the response of people. (Type your answer: describe the diagram in words, naming the axes, curves, shifts and areas.) [13] marks
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