(c) Suppose the Canadian government is unwilling to wait for the long-run adjustment process. The marginal propensity to consume is 0.8. The equilibrium real output is $500 billion and the full-employment output is $540 billion. (i) Calculate the minimum change and indicate the direction of change in government spending required to shift the aggregate demand curve by the amount of the output gap. (ii) Calculate the minimum change and indicate the direction of change in taxes required to shift the aggregate demand curve by the amount of the output gap.
(c) Suppose the Canadian government is unwilling to wait for the long-run adjustment process. The marginal propensity to consume is 0.8. The equilibrium real output is $500 billion and the full-employment output is $540 billion. (i) Calculate the minimum change and indicate the direction of change in government spending required to shift the aggregate demand curve by the amount of the output gap. (ii) Calculate the minimum change and indicate the direction of change in taxes required to shift the aggregate demand curve by the amount of the output gap.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:(c) Suppose the Canadian government is unwilling to wait for the long-run adjustment process. The marginal propensity to consume is
0.8. The equilibrium real output is $500 billion and the full-employment output is $540 billion.
(i) Calculate the minimum change and indicate the direction of change in government spending required to shift the aggregate demand
curve by the amount of the output gap.
(ii) Calculate the minimum change and indicate the direction of change in taxes required to shift the aggregate demand curve by the
amount of the output gap.
Transcribed Image Text:Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show
directional changes. If the question prompts you to "Calculate," you must show how you arrived at your final answer.
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