ECON 214 Problem Set 2 Complete All Questions Listed Below

ECON 214 Problem Set 2 Complete all questions listed below

Econ 214 problem Set 2 complete all questions listed below. Clearly label your answers.

Construct the AD, SRAS, and LRAS curves for an economy experiencing: (a) full employment, (b) an economic boom, and (c) a recession. (Graphs can be hand drawn or done by computer; label all curves and axes clearly.)

What impact would a change that shifts an economy's production possibilities curve outward have on the long run aggregate supply curve? How have improvements in computer technology affected production possibilities and the long run aggregate supply curve? Explain.

What is a budget deficit? How are budget deficits financed? Why do Keynesians believe that budget deficits will increase aggregate demand?

When output and employment slowed in early 2008, the Bush Administration and the Democratic Congress passed a legislation sending households a check for $600 for each adult (and $300 per child). These checks were financed by borrowing. Would a Keynesian favor this action? Why or why not?

Paper For Above instruction

Introduction

The dynamic nature of macroeconomic variables is critically influenced by shifts in production capabilities, fiscal policies, and technological advancements. Understanding the relationships between production possibilities, aggregate supply and demand, and fiscal deficits provides a foundation for analyzing economic fluctuations and policy responses. This paper explores these concepts comprehensively, focusing on the effects of outward shifts in production possibilities, the behavior of aggregate curves during different economic states, the nature of budget deficits, and Keynesian perspectives on fiscal stimulus measures.

Impact of Outward Shift in Production Possibilities and Technological Improvements

An outward shift in an economy's production possibilities curve (PPC) signifies an increase in the economy’s capacity to produce goods and services. Such a shift typically reflects improvements in resource endowments, technological progress, or enhancements in human capital. As the PPC expands outward, the economy can produce more at every level of utilization, resulting in an increase in the potential output. This increase in potential output directly influences the long-run aggregate supply (LRAS) curve by shifting it outward to the right, signaling an economy capable of higher production levels without increasing the price level (Mankiw, 2018).

Technological innovations, particularly in computer technology, have historically contributed significantly to these outward shifts. For instance, advances in information technology have reduced production costs, improved efficiency, and enabled the creation of new products and industries. These technological improvements lead to a sustained increase in the LRAS curve, reflecting higher productive capacity and potential GDP. The impact of such technological progress can be visualized as a rightward shift of the LRAS curve, which consequently affects aggregate supply over the long term, fostering economic growth (Rosenberg, 1982).

Constructing AD, SRAS, and LRAS Curves in Different Economic Scenarios

The aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) curves are fundamental tools for depicting macroeconomic equilibrium. During full employment, the AD intersects the SRAS and LRAS at the same point, indicating that the economy is producing at its potential output with employment at natural levels (Mankiw, 2018).

In an economic boom, aggregate demand shifts outward due to increased consumer confidence, investment, or government spending, resulting in higher real GDP and potentially causing the short-run equilibrium to temporarily surpass the potential output (LRAS). This situation can lead to upward pressure on prices and wages, triggering a shift of the SRAS curve to the left as firms face higher costs. The economy operates beyond its sustainable capacity, which is often unsustainable in the long run.

Conversely, during a recession, aggregate demand shifts inward, leading to a lower equilibrium output and higher unemployment. The SRAS may remain unchanged initially, but actual output drops below potential output (LRAS). Over time, the SRAS can shift to the right if wages and prices adjust downward, gradually restoring equilibrium at a lower level of output and employment.

(Graphs illustrating these shifts and intersections should clearly label axes, curves, and key points, such as equilibrium levels of output and price levels. due to the constraints here, visual graph representations are referenced conceptually.)

The Effect of an Outward Shift in Production Possibilities on LRAS

An outward shift of the PPC increases the potential output, which translates to a rightward shift of the LRAS curve. This change represents economic growth driven by technological progress, capital accumulation, or improvements in human capital. The rightward movement of LRAS indicates the economy's ability to produce more goods and services without causing inflationary pressures (Mankiw, 2018). Moreover, such shifts can influence short-run fluctuations when aggregate demand responds to increased confidence in future productivity, potentially stimulating consumption and investment.

Technological Improvements and Their Effects on Production and LRAS

Advances in computer technology exemplify how innovation drives productive capacity. Computers have transformed industries by streamlining production processes, enabling complex data analysis, and facilitating global communication. These changes contribute to a higher quality of capital stock and workforce efficiency, ultimately expanding the LRAS curve (Rosenberg, 1982). As a result, technological progress reduces costs, improves product quality, and fosters economic growth, allowing the economy to sustain higher levels of output and employment over time.

Understanding Budget Deficits and Keynesian Perspectives

A budget deficit occurs when government expenditures exceed revenues, necessitating borrowing to finance the gap (Mankiw, 2018). Budget deficits are typically financed through issuing government debt, which can be purchased by individuals, institutions, or foreign entities. Keynesian economics posits that fiscal policy, including deficits, influences aggregate demand through government spending and taxation.

Keynesians argue that increased government spending, especially during economic downturns, can boost aggregate demand directly, thereby reducing unemployment and stabilizing the economy. They believe that budget deficits, when used as countercyclical measures, stimulate economic activity in recessionary periods by compensating for reduced private sector spending (Keynes, 1936). This perspective sustains the view that strategic borrowing and deficit spending can be effective tools in managing economic fluctuations.

2008 Fiscal Stimulus and Keynesian Justification

In early 2008, the U.S. government implemented fiscal stimulus measures, such as direct checks to households, to counteract declining output and employment caused by the financial crisis. According to Keynesian theory, these transfers would increase disposable income, thereby boosting consumer spending and aggregate demand. The rationale is that during a recession, private sector spending contracts, and fiscal expansion through direct transfers can help close the demand gap, leading to higher output and employment (Romer, 2019).

Despite the financing through borrowing, Keynesians support such stimulus measures because they are intended to stabilize economic activity in the short term. The expectation is that increased demand will stimulate firms to produce more, hire additional workers, and restore the economy toward its full employment level. Although the increase in government debt raises concerns about fiscal sustainability, Keynesian advocates focus on the immediate positive impact on aggregate demand and economic stabilization (Blinder & Zandi, 2010).

Conclusion

The interplay between technological progress, fiscal policy, and aggregate curves significantly shapes macroeconomic outcomes. Outward shifts in the PPC and technological innovations expand the economy's productive capacity, reflected in an increased LRAS. During different economic states, coordination of AD, SRAS, and LRAS curves visualizes fluctuations and structural changes. Fiscal deficits, especially when used as countercyclical tools, can stimulate aggregate demand and mitigate economic downturns, aligning with Keynesian principles. Examining the 2008 stimulus reveals the practical application of these theories in real-world policy, emphasizing the importance of government intervention during periods of economic slack. Understanding these concepts equips policymakers with insights necessary for fostering sustainable economic growth and stability.

References

• Blinder, A. S., & Zandi, M. (2010). The Financial Crisis: Lessons for the Future. FRB of St. Louis Review, 92(3), 219–242.
• Keynes, J. M. (1936). The General Theory of Employment, Interest, and Money. Palgrave Macmillan.
• Mankiw, N. G. (2018). Principles of Economics (8th ed.). Cengage Learning.
• Rosenberg, N. (1982). Inside the Black Box: Technology and Economics. Cambridge University Press.
• Romer, C. D. (2019). Advanced Macroeconomics (5th ed.). McGraw-Hill Education.