7. Two types of economic growth The following graph shows the aggregate demand c

Question

7. Two types of economic growth The following graph shows the aggregate demand curve (AD) and the short-run aggregate supply curve (SRAS) for a hypothetical economy that produces capital goods and consumer goods. Potential output is $6 billion Suppose the government pursues an expansionary fiscal policy. On the graph, place the long-run aggregate supply curve (LRAS) in the appropriate position. Then, adjust the appropriate curve or curves to show the effect of the government policy 110 109 108 107 106 SRA LRAS AD 105._ 0 104 103 102 101 100 SRAS 0 1 2 3 4 56 789 10 REAL GDP (Billions of dollars) increases According to the AD-AS model shown on this graph, the government policy the real GDP decreases Indicate how this situation would be represented in the production possibilities curve (PPC) framework. O The PPC shifts to the right O The economy moves from an efficient level of production (on the PPC) to an inefficient level of production (inside the PPC) The PPC shifts to the left O The economy moves from an inefficient level of production (inside the PPC) to an efficient level of production (on the PPC)

Explanation / Answer

Solutions : Please go step by step to the answer

1.increases.Expansationary fiscal policy reduces interest rate ,increases investment and hence increases Aggregate demand in the economy and finally the income and empolyment in the economy is increased.Hence the real GDP is also increased.

2.The PPC shifts to right.

3. Real GDP Increase ,price level increases.

4.PPC will shift to the right..

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