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Fiscal Policy - Assignment #3

Fiscal Policy - Assignment #3 - Unit 3 Graphical Analysis...

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Unit 3 Graphical Analysis Quiz 1. Draw 3 different AD / AS graphs: one demonstrating equilibrium, one demonstrating an economy in a recession, and one demonstrating an economy during times of inflation. (make sure to label each graph what they are as well as label everything on each axis) a. equilibrium or optimal b. recession c. inflation 2. What are the 3 reasons that AD is downward sloping and briefly explain each? Then graph a change along the curve. a. Wealth Effect: higher price levels reduce the purchasing power of the public's accumulated financial assets. The real value of assets with fixed money values (savings accounts/bonds) diminishes, thus the the public is poorer in real terms and will reduce its spending. b. Interest-Rate Effect. As price level rises, people need more money to spend, and thus need to borrow more money to buy them. This then increases the price of money (interest
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rate) and increase in demand for loans. As loans become more expensive due to the rising interest rate, consumption and investment fall. c. Foreign-Purchases Effect: as price level rises, there is substitution of cheaper foreign goods and consumption of domestic goods falls, reducing net exports. As price level here falls, there is increased buying of domestic goods, increasing net exports. d. Graphing movement along the AD curve 3. In the Keynesian model, if taxes and government spending go in the same direction by the same amount, what is the net result?
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