1. The interaction of balanced budgets and economic fluctuations Suppose the constitution of the country of Bonstia requires a balanced budget and that current fiscal policies yield a balanced budget when output is at potential GDP. Suppose now that output in Bonstia rises above potential GDP. In order to maintain a balanced budget without changing expenditures, the government would have to taxes. The following graph shows the aggregate demand (AD) and short-run aggregate supply (AS) curves for the economy of Bonstia after the rise in output, but before the change in taxes. The vertical green line shows the economy's potential GDP. Shift one of the curves on the graph to illustrate how the change in taxes will impact the economy. (Ignore any supply-side effects of the change in taxes.)

1. The interaction of balanced budgets and economic fluctuations Suppose the constitution of the country of Bonstia requires a balanced budget and that current fiscal policies yield a balanced budget when output is at potential GDP. Suppose now that output in Bonstia rises above potential GDP. In order to maintain a balanced budget without changing expenditures, the government would have to taxes. The following graph shows the aggregate demand (AD) and short-run aggregate supply (AS) curves for the economy of Bonstia after the rise in output, but before the change in taxes. The vertical green line shows the economy's potential GDP. Shift one of the curves on the graph to illustrate how the change in taxes will impact the economy. (Ignore any supply-side effects of the change in taxes.)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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