7. Supply-side effects Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand curve (AD) and short-run aggregate supply curve (SRAS) for the economy. The long-run aggregate supply curve (LRAS) is represented by a vertical line at $6 trillion. The economy is initially producing at potential output. Suppose that fiscal authorities decide to decrease marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term change. Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level. 120 LRAS SRAS 100 AD 80 SRAS 60 LRAS 40 AD 20 2 8 10 12 QUANTITY OF OUTPUT (Trillions of dollars) PRICE LEVEL

7. Supply-side effects Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand curve (AD) and short-run aggregate supply curve (SRAS) for the economy. The long-run aggregate supply curve (LRAS) is represented by a vertical line at $6 trillion. The economy is initially producing at potential output. Suppose that fiscal authorities decide to decrease marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term change. Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level. 120 LRAS SRAS 100 AD 80 SRAS 60 LRAS 40 AD 20 2 8 10 12 QUANTITY OF OUTPUT (Trillions of dollars) PRICE LEVEL

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.8P

See similar textbooks

Similar questions

Name some economic events not related to government policy that could cause aggregate demand to shift.
On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why aggregate demand does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper?
4.
5. Supply-side effects Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand (AD) curve and short-run aggregate supply (AS) curve for the economy. The long-run aggregate supply curve is represented by a vertical line at the potential GDP level of $6 trillion. The economy is initially producing at potential GDP. Suppose that fiscal authorities decide to decrease marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term change. Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther 8 100 8 PRICE LEVEL 8 9 8 True Potential GDP O False AS AD 10 QUANTITY OF OUTPUT (Trillions of dollars) 12 True or False! Supply side…
6. Assume that a hypothetical economy with an MPC of 0.75 is experiencing severe recession. By how much would government spending have to rise to shift the aggregate demand curve rightward by $35 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt.
1. In the diagram for this exercise, use aggregate demand and short-run and long-run aggregate supply curves to show an economy at a short-run equilibrium with a contrac- tionary gap of $0.5 trillion when potential output is $10 trillion.Then illustrate how the gap would close in the long run if the economy is self-correcting. 2. In the diagram, use aggregate demand and short-run and long-run aggregate supply curves to show an economy at a short-run equilibrium with an expansionary gap of $0.5 trillion when potential output is $10 trillion.Then illus- trate how the gap would close in the long run using an activist approach.
2. The economy of Newland is in short-run macroeconomic equilibrium. The current real output is $400 billion, and the full employment output is $500 billion. The marginal propensity to consume is 0.8. (a) Is the economy experiencing a recessionary output gap or an inflationary output gap? Explain. (b) Assume Newland's government is considering taking action to close the output gap identified in part (a). (i) Calculate the minimum change and indicate the direction of change in government spending required to shift the aggregate demand curve to close the output gap. Show your work. (ii) If instead Newland's government changes income taxes without changing government spending, calculate the minimum change and indicate the direction of change in income taxes required to shift the aggregate demand curve to close the output gap. Show your work. (c) Which fiscal policy action, changing government spending or changing income taxes, is more effective in closing the output gap? Explain. 1 (d)…
Assume an economy that is operating above full employment. Draw a correctly labeled aggregate demand and aggregate supply graph and show each of the following: a. The long-run aggregate supply curve. b.Current price level and output levels, labeled PLe and Ye c. Full employment output, labeled Yf 2. Identify one fiscal policy action that could resolve the problem. 3. Using your graph in question 1, show the short-run effects of the action you identified on each of the following: a. Aggregate demand. Explain (use the cause and effect chain you learned in the lesson) b. Output c. Price Level 4. Using a correctly labeled loanable funds graph, show the effect of the policy you identified in question 2 on real interest rates. 5. Given the change in the real interest rate in question 4. What is the impact on each of the following? a. Investment…
1.
7. Effects of an active or passive policy The following graph shows the aggregate demand curve (ADAD), the short-run aggregate supply curve (SRASSRAS), and the long-run aggregate supply curve (LRASLRAS) for a hypothetical economy. 04812162024360300240180120600PRICE LEVELREAL GDP (Trillions of dollars)AD SRAS LRAS12, 180 Suppose the economy is in short-run equilibrium. The of $4 trillion drives unemployment the unemployment rate consistent with full-employment output. Suppose public officials are concerned about the $4 trillion gap in the economy and the resulting lower-than-expected aggregate demand. The government has decided to follow a passive approach to policymaking. On the following graph, shift the ADAD curve, the SRASSRAS curve, or both to show the intended effect of this approach. Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just…
explanation. Be sure to exp Assume the United States has been in another recession for the past 10 months. Unemployment is 10% and GDP has dropped $1.9 trillion from its previous peak of $ 20.8 trillion. The housing and heavy equipment industries have been hit the hardest. Inflation has been near the 2% target but has started to dip below. Also, the countries average MPC is 60. Determine the best fiscal policy/strategy to help the economy recover and explain why it is the best choice. Be sure to reference Aggregate Demand and Aggregate Supply and explain your specific tools in your answers. Calculations Explanation Graph (More space for the explanation on the back)
3. Suppose an economy had aggregate demand components with the following relationships: Consumption Spending, C-140 +0.60*(DY) Investment Spending, I-25 +0.15"Y Government Spending, G-0 Net Export Spending, X=0 Tax Collections, Tx = 0 a. What is the equilibrium income for this economy (Show your work)? b. If the Government decided to Increase G spending by 6, what would be the new equilibrium income for this economy (Show your work)? Page 2 bed tooing c. If instead the Government decided to Reduce Tx (taxes) by 10 (i.e., send checks to people), what would be the new equilibrium income for this economy (Show your work)? d. If instead the Government decided to Increase G spending and Increase Tx (taxes) by 20, what would be the new equilibrium income for this economy (Show your work)?