5. Fiscal policy in the AD-AS model and the multiplier effect The following graph shows a hypothetical economy that uses the dollar as its currency. The economy is in short-run equilibrium at an output level of 300 billion and a price level of 60. Suppose that the economy's potential output is $500 billion. Use the purple line (diamond symbols) to plot the long-run aggregate supply (LRAS) curve on the graph. 120 SRAS 100 AD 80 SRAS 60 LRAS AD 100 200 300 400 500 600 REAL GDP (Index numbers) above, below, the same as This economy's output is potential output. To restore the economy to its potential, the government could use fiscal policy. expansionary, restrictive? Shift either the AD curve or the SRAS curve to illustrate the changes consistent with the chosen government policy. Suppose that the marginal propensity to consume in this economy is 0.80. Assume, for simplicity, that there are no taxes or other factors that could alter the multiplier effect of a change in government expenditures. 2.50. 5. 4. 1.25 The economy's expenditure multiplier is , which means that the government must alter its expenditures by to restore output to potential output. $200 billion $40 billion $50 billion $160 billion PRICE LEVEL(Billions of dollars)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Dear Expert, the question that is provided as an image is one question.

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5. Fiscal policy in the AD-AS model and the multiplier effect
The following graph shows a hypothetical economy that uses the dollar as its currency. The economy is in short-run equilibrium at an output level of
300 billion and a price level of 60. Suppose that the economy's potential output is $500 billion.
Use the purple line (diamond symbols) to plot the long-run aggregate supply (LRAS) curve on the graph.
(?
120
SRAS
100
AD
80
SRAS
60
LRAS
40
AD
20
100
200
300
400
500
600
REAL GDP (Index numbers)
above, below, the same as
This economy's output is
v potential output. To restore the economy to its potential, the government could use
v fiscal policy.
expansionary, restrictive?
Shift either the AD curve or the SRAS curve to illustrate the changes consistent with the chosen government policy.
Suppose that the marginal propensity to consume in this economy is 0.80. Assume, for simplicity, that there are no taxes or other factors that could
alter the multiplier effect of a change in government expenditures.
2.50, 5, 4, 1.25
The economy's expenditure multiplier is
, which means that the government must alter its expenditures by
v to restore
output to potential output.
$200 billion
$40 billion
$50 billion
$160 billion
PRICE LEVEL (Bilions of dollars)

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