Answer to Question #212291 in Macroeconomics for Akhona Klanisi

Question

Earlier in 2021, the minister of Finance Tito Mboweni presented the budget. Some economists speculated that since government is on the fiscal consolidation path. Government was going to raise taxes to reduce the budget deficit. However, on the contrary, government proposed reduced spending in form of slashed public wage bill. Use the AD-AS framework to explain logically the potential effect of such a policy move on output and prices. [Make reference to what happens to the curves but NO drawings of graphs required].

1. In the medium term

Answer 1

Inflation which is a result of AD increment causes demand-pull inflation. The reason why the minister announced this was due to inflation. The increasing rate in the price level causes inflation. If the AD decreases, the output level will decline, which is a sign of high unemployment numbers. When AS is higher than AD, that means the planned inventory goes above the goal level. To ensure that unnecessary inventory increment, the minister's department, through the minister, reduced the salary, which is the output until AD equals AS.

The aggregate demand curve immediately turns the aggregate components of spending on imports not included in exports, demand-consumption, government spending, and investment spending. Therefore, the minister had to say that there should be a cut-off of salary to boost economic growth. In AD and AS, the final economic development is due to an increase in productivity for a long time and a gradual shift to the right of aggregate supply. Therefore, the Aggregate demand-aggregate supply is used because it is a way the national income determination is illustrated and the price level change.

In brief monetary information and uncertainty lags are drawn into a random likening model to ensure whatever setting that results meets some goals that the government, through the minister's information. Some of them are also relatively informed. After a particular setting is complete, the optimum can show off different relationships between total output and money and price. The price level in all cases is sticky; its response direction and the direction of the total output are determined by the lag magnitude and features of subtle correlation serial features of the money supply.