Describe what occur to prices and output assuming economy

Reference no: EM13394701

The government decides to embark upon a new initiative to conserve the country's forested lands. Congress doesn't want to establish bureaucratic oversight of such a large project though. Sensing that there is a national consensus supporting forest conservation, Congress passes legislation it names the Save America's National Timber Areas (SANTA) act. Under SANTA, the government will send each U.S. citizen $250 that it hopes will be spent on planting trees, but there are no binding requirements for any citizen to spend it thus. To finance this ambitious conservation project, the government must issue (sell) bonds. Explain what will happen, as a result of this government borrowing and spending, to interest rates, the budget deficit, and the government purchases (G) component of GDP. Explain what will happen to prices and output as a result of SANTA, assuming the economy has much unused capacity and therefore the Aggregate Supply curve is in the Keynesian range (i.e., horizontal AS curve). Explain what will happen to prices and output assuming the economy is operating at its long-run potential output and therefore the Aggregate Supply curve is in the Classicist range (i.e., vertical AS curve).

Reference no: EM13394701

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