Macroeconomics Homework: Analyzing Unit 9 Economic Scenarios

This document presents a solution to a Macroeconomics assignment focusing on Unit 9 concepts. The assignment analyzes the effects of changes in asset prices, government taxes, government spending, and monetary policy on aggregate demand and aggregate supply in both the short-run and long-run. It explores how these changes impact equilibrium, inflationary gaps, and deflationary pressures. The solution provides detailed explanations and diagrams to illustrate the shifts in aggregate demand and supply curves, along with the resulting changes in price levels and output. Furthermore, the assignment examines the use of fiscal and monetary policies to address economic imbalances, such as inflationary gaps and deflationary pressures, and bring the economy back to its potential output level. The document references several academic sources to support the analysis.

Running head: MACROECONOMICS
Macroeconomics
Name of the student
Name of the university
Author Note

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Table of Contents
Unit 9:.........................................................................................................................................2
1.a)..........................................................................................................................................2
b)............................................................................................................................................2
2.a)..........................................................................................................................................2
b)............................................................................................................................................3
c).............................................................................................................................................3
References:.................................................................................................................................4

2MACROECONOMICS
Unit 9:
1.a)
Due to decrease in the asset prices of stock market, the household wealth reduces,
which in turn decreases the consumer expenditure. Thus, according to first figure, aggregate
demand curve in long-run has decreased as the curve has shifted towards left from D1 to D2.
At this moment, both price level and output level have reduced.
In the second phase, aggregate supply curve in short-run has increased as the curve
moves from S12 to S2. People sell their stocks due to its decreasing prices and consequently
supply of it has increases (Hawkins, 2017). This new equilibrium situation further increases
price level though national income remains at its initial level in third diagram.
b)
As the government decreases its taxes, household’s disposable income increase and
this further increases the aggregate demand within the economy. The first diagram represents
this situation, where the aggregate demand curve increases from D1 to D2.
On the other side, the government spending remains same. Hence, the short-run
supply curve increases and consequently this curve shifts to the right from S1 to S2
(Benhabib Wang & Wen, 2015). However, the long-run supply curve remains unchanged.
Thus, the new equilibrium position has changed. At this moment, aggregate price
level increases while output level remains at its initial level.
2.a)
In the long-run equilibrium condition, the stock market occurs and this further
increases the value of stocks that households hold. This helps consumer expenditure to
increase and consequently aggregate demand curve in short run shifts towards right, that is,

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from SRAD1 to SRAD2. However, long run supply curve remains same. Thus, the economy
experiences inflationary gap as it cannot reach to its potential level of output.
In this situation, policymakers apply contractionary fiscal policy to reduce this gap
(Jordà & Taylor, 2016). As a result, the economy backs to its initial potential level of output
by shifting aggregate demand curve to the left from SRAD2 to SRAD3.
b)
The aggregate demand curve increases and shifts towards right from SRAD1 to
SRAD2 when the government increases its spending. However, both short-run and long-run
supply curve remain unchanged and consequently the economy experiences an inflationary
situation (Jordà & Taylor, 2016). This situation can be recovered through contractionary
fiscal policies and this can further bring the demand curve back at its initial level from
SRAD2 to SRAD3.
c)
The Central Bank reduces the money supply for which interest rate increases. Thus,
investment expenditure decreases and this in turn reduces aggregate demand of this economy
(Hawkins, 2017). Thus, the short-run supply curve shifts towards left from SRAD1 to
SRAD2.
The economy experiences a deflationary pressure and consequently the government
takes expansionary fiscal policy (Truger, 2015). Thus, the demand curve increases from
SRAD2 to SRAD3 during short-run.

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References:
Benhabib, J., Wang, P., & Wen, Y. (2015). Sentiments and aggregate demand
fluctuations. Econometrica, 83(2), 549-585.
Hawkins, R. J. (2017). Macroeconomic susceptibility, inflation, and aggregate
supply. Physica A: Statistical Mechanics and its Applications, 469, 15-22.
Jordà, Ò., & Taylor, A. M. (2016). The time for austerity: estimating the average treatment
effect of fiscal policy. The Economic Journal, 126(590), 219-255.
Truger, A. (2015). The fiscal compact, cyclical adjustment and the remaining leeway for
expansionary fiscal policies in the Euro area. Panoeconomicus, 62(2), 157-175.