Answer to Question #89496 in Macroeconomics for Falema

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. (2 marks)
b. Which variables would have to be affected in each case to bring about the relevant
changes in aggregate supply or aggregate demand? (2 marks)
c. Which of these variables is it most likely that government could influence strongly?
Explain. (2 marks)
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. (2 marks)

Answer 1

a. The economy might be moved towards full

employment through the increase in aggregate demand.

b. Government spending, taxes or money supply would have to be affected to bring about the relevant changes aggregate demand.

c. It is most likely that government could influence its spending strongly.

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. It's true.