Aggregate Supply, Aggregate Demand And Fiscal Policy

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.)