Price Level 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 160 LRAS AS 140 120 100 80 60 40 20 0 AD AD 1 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars) 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 0.6, how much does government purchases need to change to shift aggregate demand by the amount you found in Dart a? EA billion Suppose instead that the MPC is 0.75. 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.

Aggregate Supply and Aggregate Demand show the relationship between economic output (GDP) and price levels in the macro-economy at a given point in time. Define the terms ‘Aggregate Demand’ and ‘Aggregate Supply.’ State TWO (2) monetary and TWO (2) fiscal policies that government can adopt, to effect change in Aggregate Demand.

QUESTION 32 The government can use in the form of O a contractionary fiscal policy, a decrease in government spending Ob. an expansionary fiscal policy, an increase in government spending C. an expansionary fiscal policy, an increase in corporate taxes da contractionary fiscal policy, a reduction in taxes to decrease the level of aggregate demand in the economy.

The graph below depicts an economy where an increase in aggregate demand has caused Inflation. Assume the government decides to conduct fiscal policy by changing taxes to bring Inflation under control. Price Level 160 150 140 130 120 110 100 90 80 70 60 50 Fiscal Policy LRAS AS Real GDP (billions of dollars) AD₁ AD 40 80 160 240 320 400 480 560 640 720 800 Instructions: Round your answers to 2 decimal places. If you are entering a negative number include a minus sign. 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 do taxes need to change to shift aggregate demand by the amount you found in part a? $ billion Suppose Instead that the MPC is 0.5. c. How much does aggregate demand and taxes need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and taxes need to change by $ billion.

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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. Price Level 180 160 140 120 100 80 60 40 20 0 Fiscal Policy LRAS AS AD AD, 100 200 300 400 500 600 700 800 900 1000 Real GDP (billions of dollars) Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. 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? $ (50) → 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 $ (200) billion and government purchases need to change by…

Identify each scenario as an example of expansionary fiscal policy, contractionary fiscal policy, or not an example of fiscal policy. a. An increase in the money supply is b. A decrease in taxes is fiscal policy. not an example of fiscal policy. a contractionary an expansionary d. An increase in tax rates is c. A decrease in the unemployment rate is fiscal policy. fiscal policy. f. A decrease in the money supply is e. A decrease in government spending is fiscal policy. fiscal policy. h. An increase in corporate bonds purchased is g. A decrease in transfer payments is fiscal policy. fiscal policy. i. An increase in government spending is fiscal policy.

SRAS PL2 PL AD2 AD REAL GDP The Aggregate Demand Model shows an increase in Aggregate Demand or an increase in GDP. Which Fiscal Policy Action would cause this change O Raise Taxes & Cut Government Spending O Decrease Taxes & Government Spending O Increase Taxes & Government Spending O Cut Taxes and Increase Government Spending PRICE LEVEL

If Congress wanted to help the economy out of a recession, they would be most likely to: check all that apply increase interest rates reduce government spending O increase transfer payments O decrease taxes

Question 4 Using AD\ AS model, show how the fiscal policy work in case of recession.