1.Suppose that aggregate demand increases by $1 billion, what would happen to eq
ID: 2495245 • Letter: 1
Question
1.Suppose that aggregate demand increases by $1 billion, what would happen to equilibrium RGDP? Explain.
2.When the price level is falling, we experience deflation. This occurred in Japan not to long ago. What do you believe causes deflation? How might individuals and businesses react to deflation in a way that worsens it?
3.What would changing the rules to Employment Insurance payments so that it was more difficult to collect, do to potential GDP?
4.What can governments in Canada do to encourage economic growth?
Explanation / Answer
1. With the increase in aggregate demand, the equilibrium Real GDP will increase by a multiple of the amount of the increase in aggregate demand as per the theory of Multiplier formulated by Keynes. The value of the multiplier or the amount by which real GDP increases depends on the value of Marginal Propensity to Consume.
2. The fall in the aggregate demand in the economy due to fall in consumption expenditure by the consumers or fall in investment expenditure or Fall in government spending or fall in the net exports causes deflation.
As prices fall, people put off their purchases hoping that they will get a better deal later. Thus,businesses are pressurized to lower prices which leads to lower wages and less investment spending. Massive deflation can turn recession into depression.
3. Please explain as the language of the question is not clear. I will answer after you reply.
4. Reduce income tax burden, helping the unemployed, creating infrastructure to create jobs, Advancing Knowledge economy,.
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