3. Discretionary fiscal policy and multiplier effects Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.8. The following graph shows the aggregate demand curves (AD and AD:), the short-run aggregate supply curve (SRAS), and the long-run aggregate supply curve (LRAS). The economy is currently at point A. PRICE LEVEL LRAS 140 130 SRAS24 120 8 8 132 124 120 116 112 100 200 300 400 500, 120 AD₂ AD 500 600 700 600 000 1000 REAL GDP (Billions of dollars); The economy is currently experiencing an inflationary gap of $ In order to close this gap, one option would be for the government to taxes do not change). If the government kept its purchases constant, it could also close the gap by billion. government purchases by $ billion (assuming net net taxes by $ billion.
3. Discretionary fiscal policy and multiplier effects Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.8. The following graph shows the aggregate demand curves (AD and AD:), the short-run aggregate supply curve (SRAS), and the long-run aggregate supply curve (LRAS). The economy is currently at point A. PRICE LEVEL LRAS 140 130 SRAS24 120 8 8 132 124 120 116 112 100 200 300 400 500, 120 AD₂ AD 500 600 700 600 000 1000 REAL GDP (Billions of dollars); The economy is currently experiencing an inflationary gap of $ In order to close this gap, one option would be for the government to taxes do not change). If the government kept its purchases constant, it could also close the gap by billion. government purchases by $ billion (assuming net net taxes by $ billion.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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am. 152.
Transcribed Image Text:3. Discretionary fiscal policy and multiplier effects
Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.8. The following graph shows the aggregate demand curves
(AD and AD:), the short-run aggregate supply curve (SRAS), and the long-run aggregate supply curve (LRAS). The economy is currently at point A.
PRICE LEVEL
LRAS
140
130
SRAS24
120
8 8
132
124
120
116
112
100
200 300
400
500, 120
AD₂
AD
500
600
700
600
000
1000
REAL GDP (Billions of dollars);
Transcribed Image Text:The economy is currently experiencing an inflationary
gap of $
In order to close this gap, one option would be for the government to
taxes do not change).
If the government kept its purchases constant, it could also close the gap by
billion.
government purchases by $
billion (assuming net
net taxes by $
billion.
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