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. LRAS 150 140 130 120 110 K 100 90 80 70 60 Price Level Fiscal Policy 160 AS AD₁ AD 50 40 80 160 240 320 400 480 560 640 720 800

Assuming that the economy shown in the figure below is in equilibrium, calculate the recessionary or inflationary gap in each case below. AS 350 AD 300 250 200 150 100 50 100 200 300 400 500 600 700 800 900 1000 Real GDP a. Potential GDP (LAS) is $300 then there is a(n) (Click to select) ♥ gap of $ (Click to select) b. Potential GDP (LAS) is $600 then there is a(n) inflationary recessionary Įgap of $ c. Potential GDP (LAS) is $750 then there is a(n) (Click to select) v gap of $ Price index

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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 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.

Extra Credit The economy of the country Keinesia is heavily dependent on imported oil. Due to a crisis in the Middle East, the oil price has sharply increased. 1. What do you expect to happen to the equilibrium output and prices? Use the AD-AS model to illustrate it. 2. You are the economic adviser to the president of Keinesia. a. Would you advise him/her to implement Fiscal Policy? b. What type of Fiscal Policy would you recommend? c. Illustrate the effect of the Fiscal Policy on the equilibrium output and prices? Use the AD- AS model in part (a) to illustrate it.

of The economy of Langoria is currently in a state of long-run equilibrium in which the economy is producing at its Natural Real GDP. The level of Real GDP is currently 3 trillion dollars, and the price level is 130. 100 PRICE LEVEL 170 160 150 140 130 120 110 100 2 Changes in a Self-Regulating Economy AD AD₂ BRAS 1 2 3 LRAS 23

Price level (GDP price index, 2012 140 130 120 110 105 100 90 90 19 Potential GDP ADO 21 20 AS 22 Real GDP (trillions of 2012 dollars) The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP. In the figure above, the can change expenditure by gap is one trillion dollars. To close the gap, the government one trillion dollars. recessionary; exactly inflationary; more than recessionary; less than recessionary; more than

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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

pols Homework (Ch 15) 4. Using fiscal policy to fight inflation Consider the hypothetical economy depicted on the graph. Initially, the economy operates below full-employment output at a price level of 105 and real GDP of $480 billion. Then aggregate demand (AD) increases from AD₁ to AD₂, moving the economy up along the intermediate and classical ranges of the aggregate supply (AS) curve. Real GDP increases to the full-employment output level of $540 billion, and the price level increases to 120. PRICE LEVEL (CPI) 130 125 120 115 110 100 95 90 85 80 400 420 440 AS AD₂ 460 REAL GDP (Billions of dollars) AD₁ 480 500 520 540 560 580 600 MacBook Pro (?) X