Using a graph, show the effects of a weaker dollar on the economy. Explain
What will be an ideal response?
The original equilibrium is where AD1 intersects AS1. A weaker dollar causes aggregate supply to decrease, represented by a shift from AS1 to AS2. But the weaker dollar makes imports more expensive and exports cheaper, so aggregate demand increases from AD1 to AD2. The new equilibrium is where AD2 intersects AS2, with an increase in real Gross Domestic Product (GDP) and a rise in the price level. This result is due to the fact that aggregate demand shifted further than aggregate supply. Real Gross Domestic Product (GDP) would have fallen if the shift in aggregate supply had been greater than the shift in aggregate demand.
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Imagine that the U.S. economy is in equilibrium at full employment without inflation where national income is at $6,700 billion. The MPC = 0.8 . If massive flooding along the Mississippi River leads Congress to approve a spending package of $10 billion to aid flood victims, the government must also take which of the following actions to keep the economy in equilibrium at full employment without
inflation? a. increase taxes by $10 billion b. decrease taxes by $10 billion c. cut other government spending programs by $7.5 billion d. increase taxes by $12.5 billion e. decrease taxes by $12.5 billion
As productivity in the manufacturing sector increases, the service sector must keep pace or it will become more expensive in the long run
a. True b. False Indicate whether the statement is true or false