How Market Will Eventually Fix Itself Given Enough Time (Coursework Sample)

Part 2: Short Answer
1 Draw an aggregate supply and aggregate demand model showing an economy in a recessionary gap. Explain how the market will eventually fix itself given enough time, and also explain what the government might be able to do to get the economy back to full-employment faster. Although both methods will get us to full-employment, what is the main difference between the two? (8 points)
ANSWER:
103822518605500LRAS
269557511747500
18288008572500152400027622500152400027622500PriceSRAS
2419350679450010382256413500
AD
AD1
24193506858000103822517018000
Real GDP
Recessionary Gap
Difference between in the equilibrium real production in short run aggregate market and also full employment occurs when in short run equilibrium real production is less than full employment. A recessionary gap associated with the business cycle contraction. This gap occurs when the short run equilibrium generate production difference from the employment level.
2 Draw a labor market then show and explain the effect of an income tax on the full-employment level of labor, the price paid by firms for workers, and the wage received by workers. (6 points)
78105030480000In full employment tax impact on Firm
1371600958850012763509588500WS
78105020129500188595020129500101917520129500W1+1
22479001924050078105019240500W0A
18859502508250078105025082500261937525082500W1
D0
D1
78105018669000
Employment
The impact of tax, shift down to the demand curve from D0 to D1. After tax on firm worker receive from W0 to W1. In the term of the firm hiring to workers and cost of hiring also increase from W0 to W1 +1.
85725028384500Wages received by worker after tax
135255028511500150495011366500WS1
95250029527500274320029527500288607513335000114300013335000183832513335000W0+1S0
23907753054350090487530543500B
W1
W0952500114300027432001143100A
90487511684000 W1-1
D0
D1
85725025273000
E1 E0Employment
After tax supply curve shift from S0 to S1 and effect occur on the employment level. Here the equilibrium level shifts from A to B. now worker increase the wages from W0 to W1. Here the total employment level decreases from the E0 to E1.
3 19907255143500019907255143500056197544767500Draw an aggregate expenditure model and show what happens when the price level increases. (Be sure to label the equilibrium both before and after)(5 points)
12668259017000PriceSRASLRAS
9239255270500
7143752540000059055013017500E3
12668251790700059055017907000E1E2
AD3
AD2
56197526670000AD1
Y1YfGDP
In the aggregate expenditure model the SRAS curve is horizontal until reached at full employment level. After that he becomes a vertical and when the output level is less than the capacity then on point Y1. After ...