Answer to Question #144797 in Accounting for Anushun Jayadharman

Question

Illustrate a permanent decrease in government spending
(let’s say infrastructure spending freeze) implemented in 2022. For simplicity,
assume there are no time lags. Now, illustrate that counter-cyclical monetary policy has been
implemented by the central bank. Again, use AE/PC Model (new set of graphs!).
Now your initial point is point B, mark the response as point C. There should be a
points B and C on both the upper graph and the lower graph, even if they are in the
same location. You can stop your analysis when the economy is stabilized (Y=Y*
again).
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Answer 1

A permanent decrease in government spending can be shown as a decrease in aggregate expenditure (AE). In this case the expansionary monetary policy will be implemented by the central bank to stimulate the increase in AD to reach the previous price level and potential income level (Y = Y*) .