100 AS AD’ AD 1000 1400 REAL OUTPUT The graph above shows the aggregate supply (AS) and aggregate demand (AD) curves for an economy. a. Calculate the spending multiplier if AD shifts to AD' as a result of an increase in government spending of $100. b. Will a decrease in income taxes have to be larger, smaller, or equal to $100 in order to shift the AD by the same amount as the $100 increase in government spending? Explain. c. If the marginal propensity to save decreases, will the spending multiplier increase, decrease, or remain unchanged? PRICE LEVEL
100 AS AD’ AD 1000 1400 REAL OUTPUT The graph above shows the aggregate supply (AS) and aggregate demand (AD) curves for an economy. a. Calculate the spending multiplier if AD shifts to AD' as a result of an increase in government spending of $100. b. Will a decrease in income taxes have to be larger, smaller, or equal to $100 in order to shift the AD by the same amount as the $100 increase in government spending? Explain. c. If the marginal propensity to save decreases, will the spending multiplier increase, decrease, or remain unchanged? PRICE LEVEL
Chapter1: Making Economics Decisions
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Hi I need the answer to the question below please. Thank you
Transcribed Image Text:1 hr. 30 min.
16
100-
AS
`AD'
AD
1000
1400
REAL OUTPUT
The graph above shows the aggregate supply (AS) and aggregate demand (AD) curves for an economy.
a. Calculate the spending multiplier if AD shifts to AD' as a result of an increase in government spending of $100.
b. Will a decrease in income taxes have to be larger, smaller, or equal to $100 in order to shift the AD by the same amount as the $100 increase in government
spending? Explain.
c. If the marginal propensity to save decreases, will the spending multiplier increase, decrease, or remain unchanged?
d. Now assume instead that the AS curve is upward sloping. Would the change in real gross domestic product resulting from the $100 increase in government
spending be greater than, less than, or equal to the change shown in the graph above?
e. Now assume that wages and prices are perfectly flexible. As a result of a $100 increase in government spending, will real GDP increase, decrease, or remain
unchanged? Explain.
PRICE LEVEL
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