The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to decrease government purchases as fiscal policy to restore full-employment GDP. Fiscal Policy LRAS 180- 160- 140- 120 E 100 80 60- 40- Price Level 200 20 0 Real GDP (billions of dollars) AS AD AD
The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to decrease government purchases as fiscal policy to restore full-employment GDP. Fiscal Policy LRAS 180- 160- 140- 120 E 100 80 60- 40- Price Level 200 20 0 Real GDP (billions of dollars) AS AD AD
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter30: Government Budgets And Fiscal Policy
Section: Chapter Questions
Problem 30RQ: Under what general macroeconomic circumstances might a government use expansionary fiscal policy?...
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a. How much does aggregate
$ ___billion
b. Assuming the MPC in this nation is 0.75, how much do government purchases need to change to shift aggregate demand by the amount you found in part a?
$ ___billion
c. Now suppose the MPC is 0.6. To restore the economy to its long-run equilibrium, aggregate demand must be changed by $ ___billion and government purchases must be changed by $ ___billion.
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