Term assigement - Case Study Example

2. Assume the Qatari government is pursuing an expansionary fiscal policy by increasing government purchases. Show the short run and long run impact of this policy on the macroeconomic equilibrium point using AD and AS model (assume that Qatar’s economy initially operates at the potential level of GDP). You need to draw a graph and briefly explain the short run and long run impact of this expansionary fiscal policy. Pursuing an expansionary fiscal policy through the increase of government purchases will increase budget deficit or smaller budget surplus.

The Qatari fiscal budget will be affected by the policy through its spending and taxes. It will also address the business cycle instability that gives rise to unemployment. This is called closing the recessionary gap. The aggregate market illustrates the recessionary gap as well as the short run and the long run effects of this policy. SRAS is the short run aggregate supply curve. Equilibrium in the short run occurs when price level and real production corresponds to the intersection of the SRAS and the aggregate demand curve.

Short run real production is therefore less than full employment production and their difference is the recessionary gap. The recessionary gap is what the increase in purchases or expansionary fiscal policy is designed to close. This happens when there is a rightward shift of the demand curve. It will therefore increase demand and employment in the short run but not necessary in the long run. This is shown below. 3.In December 2014, the international price of oil has dropped to almost half of its level in June 2014.

What do you think the expected impact of this drop on the US economy using the AD and AS model? Hint: Think of the impact on aggregate supply in the US and assume that the US economy initially operates at the potential GDP level. If the prices of oil drop by half, oil producers will decrease production in