Question

Use the following news clip to work on the following questions:

Debt Reduction at Center of State Election Campaign Queensland business leaders are demanding that the election campaign focuses on reducing a growing debt level and putting the state’s finances back on track. The state’s financial position has been under fire because of a debt blowout caused by the domestic and international market volatility and the natural disasters last year.

a. If reducing debt means spending cuts, will aggregate expenditure fall by more than, less than or exactly the same as the spending cuts? Explain.

b. Explain and draw a graph to illustrate the effects of the events described in the news clip on aggregate expenditure and aggregate demand in both the short run and the long run.

Answer 1

a. If reducing debt means spending cuts, then aggregate expenditure will fall by more than the spending cuts according to multiplier effect.

b. The events described in the news will decrease aggregate expenditure and aggregate demand in the short run, in the long run aggregate supply may increase and and the level of output will move back.