R ad p y rn gof tty dri flective ness lag lrr i v

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r., AD '-p Y rN gof *tt$y *dri [flective ness Lag: l:rr I V
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Solutior"r: Automatic Stabilisers - Policies that are implemented autar:ratically to redLrce har"dship during recessir:n and control inflation cluring expansion. ttgrco Lto{,) 1. Progressive lncome Tax System: Higher income group pays a higher tax rate while the lower fiw us) income group pays a lower tax rate, (i) Recession: lncome falls and le* t^xes are paid. This lql6y disposable income for spending and AD rises. This leads to rise in -_ /to .lor" ot?ol e p. (ii) tconomic growth: lncome rises and -try-- taxes are paiei. This *widw,t disposable inconre for spending anij AD falls lcarling to a ---- - in inflatir:n. 2. Unemployment Benefits:Transfer payments by governrnei:t tr: the unemployed {ii Recession: Job losses will qLralify citizens to get transfer payments from gcve rnment to boost spending and r3ise GD--P to close recessionary gap. (ii) [conomic growth: Those who find a job will no longer qualify for transfer peyn:*1ts anel this will rec{uce spending and inflationary pressures. Discussion Questions 1. The AD curve __ because, holding all else constant, an increase in __-**causes consumption, investment and net export to fall. a^ Fr L_: (A) slopes downward; realGDP T L JnE_ AO fl {B) slopes downward; the price level rate ; I\ l') ffi Ii:T,::IJi?;l-J,ll"'lve, ra,e '*,1,; ) Y 2. When go'",ernmglllqltlqys exceed tax recgints, this is callerJ {, ')- \ (A) a debt Gt T (ncc'+''1 (B) lhe crorvding out effect , ' (C) a bq3!g-et def]cit ) 7d' ?+'t (D) an expansionary fiscal policy C
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3. Wh*n;lctual output = pntentlal output and the price level is at its equilibriurn level, the ef (-)n0my rs 5ar{l l() be rn .
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