Transfer the answer(the red mark character) to the question use Essay - 1

Transfer the answer(the red mark character) to the question use totally different sentence but exactly the same meaning - Essay Example The curve illustrates government, businesses and consumers ability to buy actual Gross Domestic Product. MV=PY (the equation used in determining exchange) indicates the quantity of M (money supply) that is required to support certain units of PY (nominal GDP) for V (certain quantities of money). Expansion monetary principle has the ability to buy extra outputs and the ability to adjust money supply. When LM curve shifts outwards, the increase in demand for the actual GDP is realized at each unit of actual interest rates. c. Suppose government expenditures are increased to stimulate economic activity but no other policy action is taken. Explain why and under what conditions an increase in government expenditures will increase aggregate demand. (20 points) As the government increases its spending, interest rates also rise since initial rise in actual Gross Domestic Product triggers bond sales to compensate for additional output assuming the supply of money is constant. Increase in interest rates is alsso influenced by the government’s move to borrow money to cater for the rise in expenditures. A rise in purchase of bonds increases money’s effective velocity. Expansionary monetary rules only works in a condition where people have held their cash as assets, and when they react to the increased interest rates by cutting on the money held through buying more bonds. 2. Explain why the aggregate supply curve is vertical (in a graph with Price on the vertical axis and real GDP on the horizontal axis) under Classical economic assumptions and positively sloped in Keynesian analysis. (30 points) When workers have fully adjusted to the economic conditions, there is a vertical curve in aggregate supply. Full adjustments to economic situations and response to changes in labor market is possible because the workers have sufficient knowledge of the economic situation. The overall result is wage levels will decrease or increase depending