Graph Problem Use the graph to answer questions below. Answer is worth 10 points
ID: 2440342 • Letter: G
Question
Graph Problem Use the graph to answer questions below. Answer is worth 10 points. Price Level LRAS | SRAS 115 100 95 AD RGDP in trillions 11.5 12 If the above graph is a depiction of the state of the economy as it is now, is the economy in a recession or inflation? I. (Recession /Inflation?) 2. Given the state of the economy shown in the above graph, what fiscal policies could the Government use to combat the problems in the economy? If the government went ahead and implemented these policies; What would happen to prices? What would happen to employment? - What would happen to the government budget?Explanation / Answer
(1) Recession
[Since AD curve intersects SRAS curve to the left of LRAS curve, real GDP < potential GDP and there is recession]
(2) Government will use expansionary fiscal policy by increasing government spending and/or by decreasing tax, to increase aggregate demand and shift AD curve rightward, As a result,
Price level will increase.
Employment (and output) will increase.
Government budget will experience an increase in budget deficit (or decrease in budget surplus).
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