Suppose Congress decides to increase government spending andtaxes by equal amounts. Use the IS-LM AD-SRAS-LRAS model toillustrate graphically the short run impact of the increase ingovernment spending and taxes on output and interest rates, prices,consumption, unemployment rate and investment in short run. Explainclearly which curve would shift and why. What will be the long runimpact of this increase in government spending and taxes on outputand interest rates, prices, consumption, unemployment rate andinvestment.
Show the appropriate movement of curves both for the short run andthe long run. Be sure to label: i. the axes; ii. the curves; iii.The initial equilibrium values; iv. The direction the curves shift;and v. the short run equilibrium values and vi. The long runequilibrium values.
How can the Fed keep the economy from falling into arecession/boom due to the increase in government spending andtaxes? Use a second IS-LM-SRAS-LRAS model to illustrate graphicallythe impact of both fiscal policy of increase in government spendingand taxes and the monetary policy which prevents output fromfalling/rising. Be sure to label: i. the axes; ii. the curves; iii.The initial equilibrium values; iv. The direction the curves shift;and v. the terminal equilibrium values.
