1. Assume the United States economy is operating below the full-employment level of output and the government has a balanced budget.
a. Using a correctly labeled AD and AS graph, show how an increase in government spending will affect the following in the short run:
i. Real output
ii. The price level
Now assume that instead of increasing government spending, the US government decreases corporate-profits taxes.
b. Using a correctly labeled AD and AS graph, show and explain how this decrease in corporate-profits taxes will affect each of the following:
i. Aggregate demand
ii. Long-run aggregate supply
iii. Real output
iv. Price level
c. Assume that the USA produces two goods, X and Y. Draw a production possibilities curve for this economy. Now show on the graph how this decrease in corporate-profits taxes will affect this economy’s production possibilities curve. (i.e., Will it shift? No shift? Movement along the curve? Etc.)
