6 Consider a ypothetical closed economy in which the marginal propensity to consume (MPC) is 0.8 and taxes do not vary with income (that is,taxes are fixed rather than variable and the income tax ratet=0). The following graph shows the aggregate demand curves (ADI and AD2), theshort-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A.140Potential GDP136AS124132128124P 120116AD1112AD,100400500600700s00900100011001200REAL GDP (B4lions of dollars)The economy is currently experiericinggap of Sbillion.To cdose this gap, one option would be for the government togovernment purchases by Sbillion (assuming net taxes donot change).If the government kept its purchases constant, it could also close the gap bynet taxes (taxes minus transfers) by 5billion(Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes isMIC1- MICGrade It NowSave & ContinueContinue without savingPRICE LEVEL

Here, the marginal propensity to consume of the people of a closed economy is given as 0.8, and the…

Consider a ypothetical closed economy in which the marginal propensity to consume (MPC) is 0.8 and taxes do not vary with income (that is taxes are fixed rather than variable and the income tax rate t= 0). The following graph shows the aggregate demand curves (ADI and AD2), the short-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A. 140 Potential GDP 136 AS 132 128 124 P 120 116 AD2 112 AD, 108 400 500 600 700 s00 900 1000 1100 1200 REAL GOP (Blions of dollars) The economy is currently experiericing gap of S billion. To cose this gap, one option would be for the government to government purchases by S billion (assuming net taxes do not change). billion net taxes (taxes minus transfers) by S MIC 1- MIC If the government kept its purchases constant, it could also close the gap by (Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is Grade It Now Save & Continue PRICE LEVEL

Consider a ypothetical closed economy in which the marginal propensity to consume (MPC) is 0.8 and taxes do not vary with income (that is taxes are fixed rather than variable and the income tax rate t= 0). The following graph shows the aggregate demand curves (ADI and AD2), the short-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A. 140 Potential GDP 136 AS 132 128 124 P 120 116 AD2 112 AD, 108 400 500 600 700 s00 900 1000 1100 1200 REAL GOP (Blions of dollars) The economy is currently experiericing gap of S billion. To cose this gap, one option would be for the government to government purchases by S billion (assuming net taxes do not change). billion net taxes (taxes minus transfers) by S MIC 1- MIC If the government kept its purchases constant, it could also close the gap by (Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is Grade It Now Save & Continue PRICE LEVEL

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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