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Economics Assignment - Full Employment

   

Added on  2020-03-16

4 Pages523 Words35 Views
CourseNameInstitution AffiliationPart 1Price LRASSRAS levelPEP1E1AD AD1Y1 YReal outputUsing the above figure, the economy is at full employment at point Y. Fullemployment is where all the resources available have been used to produce a certain level of
Economics Assignment - Full Employment_1
output where the economy cannot absorb any more labor. When the credit squeeze happens,there is a reduction in consumption. This is due to units becoming more expensive due to lessmoney circulation. This affects aggregate demand that falls from AD to AD 1. The fall inaggregate demand reduces the supply levels which reduces investment spending and leads tocash outflows. As the aggregate demand decreases, the equilibrium position shifts to E1. Theprice levels will decrease from P to P1. Also there will be a reduction in real output from Y toY1 (Mankiw, 2014).Part bA credit squeeze occurs when the banks reduce their rate of lending or they consider to stoplending completely. Households and firms are therefore unable to access loanable fundswhich are required for their consumption as well as their investment spending. This situationaffects the level of aggregate demand as it reduces. Also the investment spending reducessince it is expensive to obtain local funds leading to capital outflows. In the event theaggregate supply remains the same, there will be a reduction in real output due to capitaloutflows. This means that the level of unemployment increases as the real output decreases.Also, there is reduction in the inflation since there are reduced price levels due to decreaseddemand. Overall, the economy will be performing dismally (Borio, 2014).
Economics Assignment - Full Employment_2

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