The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession. Fiscal Policy Price Level 180 LRAS AS 160 140 120 100 80 60 40 20 0 AD AD1 100 200 300 400 500 600 700 800 900 Real GDP (billions of dollars) (900, 120) Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to increase to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.75, how much does government purchases need to increase to shift aggregate demand by the amount you found in part a? $ billion Suppose instead that the MPC is 0.6. c. How much does aggregate demand and government purchases need to increase to restore the economy to its long-run equilibrium? Aggregate demand needs to increase by $ billion and government purchases need to increase by $ billion.
The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession. Fiscal Policy Price Level 180 LRAS AS 160 140 120 100 80 60 40 20 0 AD AD1 100 200 300 400 500 600 700 800 900 Real GDP (billions of dollars) (900, 120) Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to increase to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.75, how much does government purchases need to increase to shift aggregate demand by the amount you found in part a? $ billion Suppose instead that the MPC is 0.6. c. How much does aggregate demand and government purchases need to increase to restore the economy to its long-run equilibrium? Aggregate demand needs to increase by $ billion and government purchases need to increase by $ billion.
Chapter24: Fiscal Policy
Section: Chapter Questions
Problem 3P
Related questions
Question
Transcribed Image Text:The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government
decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession.
Fiscal Policy
Price Level
180
LRAS
AS
160
140
120
100
80
60
40
20
0
AD
AD1
100 200 300 400 500 600 700 800 900
Real GDP (billions of dollars)
(900, 120)
Instructions: Enter your answers as a whole number.
a. How much does aggregate demand need to increase to restore the economy to its long-run equilibrium?
$
billion
b. If the MPC is 0.75, how much does government purchases need to increase to shift aggregate demand by the amount you found in
part a?
$
billion
Suppose instead that the MPC is 0.6.
c. How much does aggregate demand and government purchases need to increase to restore the economy to its long-run
equilibrium?
Aggregate demand needs to increase by $
billion and government purchases need to increase by $
billion.
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