Question

Suppose concerns about the size of the federal budget deficit lead the U.S. Congress to cut all funding for research and development for ten years. Assuming this has an impact on technology growth, what does the AD/AS model predict would be the likely effect on equilibrium GDP and the price level?

Short answer

Cuts in R&D budget should slow productivity growth, based on the assumptions presented here. This would be represented as a leftward shift in the SRAS curve, resulting in a lower equilibrium GDP and higher price level in the model.

Step-by-step solution

concept introduction

The total quantity of products and services sought by consumers at a given price level and period is known as aggregate demand.

The value of total production produced by an economy at a certain price level over a specific time period is known as aggregate supply.

To determine

Effect on the equilibrium The GDP and price level will be determined as a result of the reduction in research and development expenditure.

Explanation

The United States Congress has put and end on research and development for the next ten years due to a financing difficulty and the growing size of the budget imbalance. Lower productivity growth, less innovation, and slower economic growth are all consequences of this. AS curve will be shifted to the left as a result of this act.

With aggregate demand staying unchanged, a leftward shift in AS would result in a lower equilibrium level of output and a higher equilibrium price level.