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2 (a) Which one of the following diagrams illustrates the impact of an increase in net exports along a Keynesian long-run aggregate supply curve? A B C D (b) Using the classical long-run aggregate supply curve, explain what will happen in the long run to real output if aggregate demand increases - Edexcel - A-Level Economics A - Question 2 - 2021 - Paper 2
Question 2
2 (a) Which one of the following diagrams illustrates the impact of an increase in net exports along a Keynesian long-run aggregate supply curve? A B C D (b) Us... show full transcript
Worked Solution & Example Answer:2 (a) Which one of the following diagrams illustrates the impact of an increase in net exports along a Keynesian long-run aggregate supply curve? A B C D (b) Using the classical long-run aggregate supply curve, explain what will happen in the long run to real output if aggregate demand increases - Edexcel - A-Level Economics A - Question 2 - 2021 - Paper 2
Step 1
Which one of the following diagrams illustrates the impact of an increase in net exports along a Keynesian long-run aggregate supply curve?
Answer
The correct answer is A. An increase in net exports leads to an increase in aggregate demand, which in a Keynesian framework will shift the AD curve to the right. Diagram A correctly illustrates this movement along the Keynesian long-run aggregate supply curve.
Step 2
Using the classical long-run aggregate supply curve, explain what will happen in the long run to real output if aggregate demand increases.
Answer
In the long run, there would be no change in real output. Classical economists assert that the economy operates at full employment in the long run, meaning that any increase in aggregate demand would only result in higher price levels rather than an increase in real output.
A diagram can be utilized to illustrate this concept, showing the AS curve as vertical at full employment, with the AD curve shifting right without affecting output.
Step 3
Explain the impact of annual fiscal deficits on the US national debt.
Answer
Annual fiscal deficits generally lead to an increase in the national debt, as the government needs to borrow money to cover the gap between its expenditures and revenues.
This can result in several impacts:
- Negative Wealth Effect: Higher national debt can negatively impact individuals' perceptions of wealth as future taxes may need to increase to pay off this debt.
- Reduction in Consumer Confidence and Consumption: If people anticipate higher taxes due to rising national debt, they may reduce their current consumption, leading to slower economic growth.