Answer to Question #88135 in Macroeconomics for Sabreen Rehana Nisha

Question

Assume that the economy is in equilibrium at a level of output below that is associated with full employment in the economy.

a. Show graphically, methods by which the economy might be move towards full employment.
b. Which variables would have to be affected in each case to bring about the relevant changes in aggregate supply or aggregate demand?
c. Which of these variables is it most likely that government could influence strongly? Explain.
d. Classical economists believe that if the economy is left on its own, without any intervention such as in a. above, there will be automatic adjustments towards full employment equilibrium. Explain.

Answer 1

a. The economy might be moved towards full employment using monetary and fiscal policies.

b. Such variables as government spending, taxes and interest rates would have to be affected in each case to bring about the relevant changes in aggregate supply or aggregate demand.

c. Government spending is most likely that government could influence strongly.

d. Classical economists believe that if the economy is left on its own, without any intervention there will be automatic adjustments towards full employment equilibrium, so it is true.