The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to conduct fiscal policy by decreasing government purchases to restore full-employment GDP. LRAS 140 120 100 EX 80 60 AD₁ 40 AD Price Level 180 160 20 Fiscal Policy 0 AS 100 200 300 400 500 600 700 800 900 1000 Real GDP (billions of dollars)
The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to conduct fiscal policy by decreasing government purchases to restore full-employment GDP. LRAS 140 120 100 EX 80 60 AD₁ 40 AD Price Level 180 160 20 Fiscal Policy 0 AS 100 200 300 400 500 600 700 800 900 1000 Real GDP (billions of dollars)
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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Transcribed Image Text:The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides
to conduct fiscal policy by decreasing government purchases to restore full-employment GDP.
LRAS
160
140
120
EX
100
80
60
AD₁
40
AD
Price Level
180
20
Fiscal Policy
0
AS
100 200 300 400 500 600 700 800 900 1000
Real GDP (billions of dollars)
O
Transcribed Image Text:Instructions: Enter your answers as a whole number. If you are entering any negative numbers be sure to include a negative sign (-) in
front of those numbers.
a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium?
200 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?
billion
Suppose instead that the MPC is 0.6.
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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