Consider an economy that has the following GDP and price levels if there was no fiscal policy: Year Potential real GDP 1 $18 trillion $18.2 trillion $18.7 trillion 2 3 Actual real GDP $18 trillion $18.3 trillion $18.5 trillion Price level 175 182 187 What should the government do if it wants the real GDP at its potential level in year 1 and there were no fiscal policy lags? Choose one: A. recommend an expansionary fiscal policy B. recommend a contractionary fiscal policy O C. no change is necessary See Hin

Consider an economy that has the following GDP and price levels if there was no fiscal policy: Year Potential real GDP 1 $18 trillion $18.2 trillion $18.7 trillion 2 3 Actual real GDP $18 trillion $18.3 trillion $18.5 trillion Price level 175 182 187 What should the government do if it wants the real GDP at its potential level in year 1 and there were no fiscal policy lags? Choose one: A. recommend an expansionary fiscal policy B. recommend a contractionary fiscal policy O C. no change is necessary See Hin

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession. Price Level 160 140 LA 120 100 80 60 40 20 0 Fiscal Policy LRAS AD₁ Real GDP (billions of dollars) billion AS 80 160 240 320 400 480 560 640 720 800 AD O Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? billion B b. If the MPC is 0.6, how much does government purchases need to change to shift aggregate demand by the amount you found in part a? Suppose instead that the MPC is 0.75. c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and government purchases need to change by $ billion.
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10. Agreements and disagreements among economists regarding fiscalpolicy Consider a hypothetical economy in which households spend $0.75 of each additional dollar of their after-tax income. The expenditure multiplier for this economy is Suppose that this economy is experiencing a recession. The government would like to stimulate aggregate demand and is deciding whether it should increase its spending by $1 billion or reduce income tax by $1 billion. Assume other things remain constant, and the marginal propensity to consume remains at 0.75. Before any multiplier effect takes place, a $1 billion increase in government spending will increase the aggregate demand by s $1 billion reduction in income tax will increase the aggregate demand by billion, while a billion. Now consider the effect of each fiscal policy after the multiplier effect is complete. A $1 billion increase in government spending will result in a total increase of aggregate demand by $ billion, whereas a $1 billion…
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