Budget Deficit

Complete all questions listed below. Clearly label your answers 1. What impact would a change that shifts an economy’s production possibilities curve outward have on the long run aggregate supply curve? It will cause it to shift right. How have improvements in computer technology affected production possibilities and the long run aggregate supply curve? They have cut the cost of doing business and expanded our production capacity. These types of improvements enhance productivity and shift the LRAS and SRAS curves to the right.

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2. Construct the AD, SRAS, and LRAS curves for an economy experiencing: (a) full employment, (b) an economic boom, and (c) a recession. (Graphs can be hand drawn or done by computer; label all curves and axes clearly.)

3. What is a budget deficit? A situation in which total government spending exceeds total government revenue during a specific time period, usually one year. How are budget deficits financed? Selling of bonds, borrowing from abroad, raising taxes, and selling of assets. Why do Keynesians believe that budget deficits will increase aggregate demand? Because they believe that both fiscal and monetary policies affect aggregate demand.

4. When output and employment slowed in early 2008, the Bush Administration and the Democratic Congress passed a legislation sending households a check for $600 for each adult (and $300 per child). These checks were financed by borrowing. Would a Keynesian favor this action? Yes, because Keynesian are in favor of government influence on the economy.

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