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.

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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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.
160
Price Level
140
120
100
80
60
40
20
0
Fiscal Policy
LRAS
AS
80 160 240 320 400 480 560 640 720 800
AD
AD₁
Real GDP (billions of dollars)
billion
Instructions: Enter your answers as a whole number.
a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium?
$
billion
b. If the MPC is 0.75, how much does government purchases need to change to shift aggregate demand by the amount you found in
part a?
$
Suppose Instead that the MPC is 0.9.
C. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium?
Aggregate demand needs to change by $
billion and government purchases need to change by $
billion.
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. 160 Price Level 140 120 100 80 60 40 20 0 Fiscal Policy LRAS AS 80 160 240 320 400 480 560 640 720 800 AD AD₁ Real GDP (billions of dollars) billion Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.75, how much does government purchases need to change to shift aggregate demand by the amount you found in part a? $ Suppose Instead that the MPC is 0.9. C. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and government purchases need to change by $ billion.
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