Answer to Question #140708 in Economics for Suraj Rai

Question

Assume an economy operates in the keynisian ( horizontal) ranges of its aggregate supply curve curve. For each of the following changes in condition, state the direction of the effect on : 1. Aggregate demand, 2 aggregate supply 3. Price level and 4. Real gdp

a) A decrease in government expenditure in infrastructure
b) A severe recession occurs in a country, which has been a major importer of the nations exports.
c) The federal government reduces business taxes.
d) The central bank increases the cash interest rate

Answer 1

a) Aggregate demand will decrease, aggregate supply will remain the same, price level will remain the same and real gdp will decrease.

b) Aggregate demand will decrease, aggregate supply will remain the same, price level will remain the same and real gdp will decrease.

c) Aggregate demand will increase, aggregate supply will remain the same, price level will remain the same and real gdp will increase.

d) Aggregate demand will decrease, aggregate supply will remain the same, price level will remain the same and real gdp will decrease.