(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. (d) Assume instead Newland's government decides not to take any policy action. Will short-run aggregate supply increase, decrease, or stay the same in the long run? Explain.
(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. (d) Assume instead Newland's government decides not to take any policy action. Will short-run aggregate supply increase, decrease, or stay the same in the long run? Explain.
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter24: The Aggregate Demand/aggregate Supply Model
Section: Chapter Questions
Problem 42CTQ: On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because...
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![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 instead Newland's government decides not to take any policy action. Will short-run
aggregate supply increase, decrease, or stay the same in the long run? Explain.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F43cbbed0-89a4-442c-88a7-d60e3dc998d1%2F3035c295-f262-4f54-aa30-e5898e604367%2Fypknzxc_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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 instead Newland's government decides not to take any policy action. Will short-run
aggregate supply increase, decrease, or stay the same in the long run? Explain.
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