L. 1. Assume the country of Thorland is currently in long-run equilibrium
a. Draw a correctly labeled production possibilities curve if Thorland produces only
fried chicken and dog treats. On your graph, label a point X that demonstrates a
productively efficient output combination for Thorland
b. Draw a correctly labeled aggregate demand and aggregate supply (long run and
short run) graph for Thorland. Show each of the following
i. Equilibrium output, labeled Y1
ii. Equilibrium price level, labeled PL1
c. Assume the government of Thorland has a balanced budget and decides to
reduce income taxes
1. What effect will the reduction in taxes have on Thorland's budget? Write
out your answer.
If residents save on average 20% of their income, what will the long-term
MULTIPLIER_effects on the economy be with a decrease in taxes of $200
million? Show your work.
Show the short-run effect of the reduction in taxes on your graph from part
(b), labeling the new equilibrium output and price level Y2 and PL2,
respectively.
Assume that this is a self-correcting economy. Explain what will happen in
our ADIAS curve and show this effect on your graph from part, labeling
the new equilibrium output and price level Y3 and PL3
d. Draw a correctly labeled graph of the loanable funds market. Suppose the
government borrows money to pay for the tax cut. Show the effect of this
borrowing on your graph from part (c).
i Label the equilibrium interest rate before the government borrowing il
Label the equilibrium interest rate after the government borrowing i2
e. How will the change in the interest rate depicted in your graph from part (d) affect
real GDP in the long run? Explain your answer.
.
IV.
IL