For which of the following would you use dynamic aggregate supply and demand ana

Question

For which of the following would you use dynamic aggregate supply and demand analysis? The alternative would be static aggregate supply and demand analysis. There might be more than one answer.

1) If government purchases increases, does real GDP grow or shrink

2) The economy is currently growing at 2%. Would the growth rate be more if the Fed lowered the federal funds rate?

3) Does the price level rise or fall if taxes fall?

4) The current inflation is about 1%. If taxes fell, would the inflation rate rise?

Explanation / Answer

1. To see the effects of increase in government purchases on Real GDP, we'll have to consider some time period. Therefore, we'll use dynamic analysis.

2. we'll use both static analysis as well as dynamic analysis here.

3. Dynamic.

4. Dynamic.

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