12. Using fiscal policy to fight inflationConsider the hypothetical economy depicted on the graph. Initially, the economy operates belowfull-employment output at a price level of 100 and real GDP of $720 billion. Then aggregatedemand (AD) increases from AD₁ to AD2, moving the economy up along the intermediate andclassical ranges of the aggregate supply (AS) curve. Real GDP increases to the full-employmentoutput level of $780 billion, and the price level increases to 110.PRICE LEVEL (CPI)13012512011511010510095908580ASADAD 2600 630 660 690 720 750 780 810 840 870 900REAL GDP (Billions of dollars)The increase in aggregate demand from AD1 to AD2 causes?Activity FrameTo reduce aggregate demand by $30 billion, the government canexpenditures byinflation.Suppose the marginal propensity to consume (MPC) is 0.80. The government wants to avoid thedouble-digit inflation associated with the shift from AD₁ to AD2. The lowest possible price levelassociated with full-employment output is 105. To achieve a price level of 105 and full-employmentoutput, the government must enact a fiscal policy that reduces aggregate demand by $30 billion ateach price level.government

Full employement level prevails at : Price level = 110 & Real GDP = $780 billionIn the initial…

12. 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 100 and real GDP of $720 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 $780 billion, and the price level increases to 110. PRICE LEVEL (CPI) 130 125 120 115 110 105 100 95 90 85 8 600 630 660 690 720 750 AS 780 810 840 AD AD 2 870 900 Activity Frame

12. 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 100 and real GDP of $720 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 $780 billion, and the price level increases to 110. PRICE LEVEL (CPI) 130 125 120 115 110 105 100 95 90 85 8 600 630 660 690 720 750 AS 780 810 840 AD AD 2 870 900 Activity Frame

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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.
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2. A tabular approach to Keynesian equilibrium The following table shows some information on a hypothetical economy. The table lists real GDP, consumption (C), investment (I), government spending (G), net exports (X-M), and aggregate expenditures (AE). In this problem, assume that investment, government spending, and net exports are independent of the economy's real GDP level. X- Unplanned Inventory Real GDP C I G M AE Investment Direction of Real GDP and Employment $500 $300 $80 $60 $85 -$25 $600 $ $80 $60 $85 $600 $0 $700 $450 $80 $60 $85 $25 $800 $80 $600 $80 $60 $85 $60 $750 $50 $85 $825 $75 Using the numbers provided in the table, enter the correct numbers in the empty cells. Then, using the dropdown selection menus in the right-most column, indicate whether output will tend to increase, decrease, or remain in equilibrium at each level of real GDP in the table. (Note: The table uses negative numbers to indicate an unplanned inventory investment depletion and positive numbers to…
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Please answer everything in the photos including the graph.
4 Exhibit 11-2 Aggregate demand and supply model 110 Price level 105 (CPI) 100 95 E NE Full employment. AS AD₁ AD 5.0 5.1 Real GDP (trillions of dollars per year) Suppose the economy in Exhibit 11-2 is in equilibrium at point E, and the marginal propensity to consume (MPC) is 0.9. Following Keynesian economics, the federal government can move the economy to full employment at point E₂ by increasing government spending by $_____ billion.
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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Consider the figure to the right. If this country's government decides to increase its short-term spending, what happens to the short-run equilibrium price level, and why? Is this an example of demand-pull or cost-push inflation? Explain. 1.) Using the line drawing tool, draw either a new aggregate demand (AD) curve or a new short-run aggregate supply (AS) curve that shows the effects of temporary government spending increases. Properly label your line. 2.) Using the point drawing tool, indicate the economy's new short-run equilibrium price and level of real GDP. Label this point 'E₂.' Carefully follow the instructions above, and only draw the required objects. Price Level LRAS₁ Real GDP per Year (S trillions) AS₁ AD₁
8. Using policy to stabilize the economy The government possesses the tools necessary to influence the output level in the short run through use of monetary and fiscal policy. However, there is some debate regarding whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. The current tax system acts as an automatic stabilizer. Businesses make investment plans many months in advance. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president. Which of the following policies are examples of automatic stabilizers? Check all that apply. Personal income taxes The discount rate The federal funds rate
11. How do lower taxes affect aggregate demand? A) They increase disposable income, consumption, and aggregate demand. B) They reduce disposable income, consumption, and aggregate demand. C) They decrease corporate investment and aggregate demand. D) They increase aggregate supply and thus increase aggregate demand as well 12. Full-employment GDP is also known as A) realized GDP. B) potential GDP. C) politico-economic GDP. D) balanced-budget GDP.
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