Discretionary fiscal policy and multiplier effectsConsider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.8. The following graph shows the aggregate demand curves (AD1AD1 and AD2AD2), the short-run aggregate supply curve (SRASSRAS), and the long-run aggregate supply curve (LRASLRAS). The economy is currently at point A. The economy is currently experiencingan expansionary a recessionarygap of$billion. In order to close this gap, one option would be for the government to decreaseincreasegovernment purchases by billion (assuming net taxes do not change). This graph represents the intersection of aggregate demand and supply curves, illustrating economic equilibrium.- **Axes**: - The vertical axis is labeled "Price Level," ranging from 108 to 140. - The horizontal axis is labeled "Real GDP (Billions of dollars)," ranging from 100 to 900.- **Curves**: - **Long-Run Aggregate Supply (LRAS)**: A vertical purple line at approximately 500 billion dollars, indicating the economy's full employment output. - **Short-Run Aggregate Supply (SRAS\_124)**: An upward-sloping orange curve, reflecting the positive relationship between the price level and real GDP in the short run. - **Aggregate Demand Curves**: - **AD₁**: A downward-sloping blue line, demonstrating the inverse relationship between the price level and real GDP for one demand scenario. - **AD₂**: Another downward-sloping blue line, parallel to AD₁ but shifted to the right, representing an increase in aggregate demand.- **Equilibrium Point (A)**: - Marked by a star, located at the intersection of AD₁ and SRAS. It represents the equilibrium price level (~120) and real GDP (~400 billion dollars).This chart effectively illustrates how different aggregate demand scenarios impact the economy's equilibrium price level and output in both the short and long run.

Answered: marginal propensity to consume (MPC) is…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Discretionary fiscal policy and multiplier effects

Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.8. The following graph shows the aggregate demand curves (AD1AD1 and AD2AD2), the short-run aggregate supply curve (SRASSRAS), and the long-run aggregate supply curve (LRASLRAS). The economy is currently at point A.

The economy is currently experiencing

an expansionary

a recessionary

gap of

billion.

In order to close this gap, one option would be for the government to

decrease

increase

government purchases by

billion (assuming net taxes do not change).

This graph represents the intersection of aggregate demand and supply curves, illustrating economic equilibrium.

- **Axes**:
- The vertical axis is labeled "Price Level," ranging from 108 to 140.
- The horizontal axis is labeled "Real GDP (Billions of dollars)," ranging from 100 to 900.

- **Curves**:
- **Long-Run Aggregate Supply (LRAS)**: A vertical purple line at approximately 500 billion dollars, indicating the economy's full employment output.
- **Short-Run Aggregate Supply (SRAS\_124)**: An upward-sloping orange curve, reflecting the positive relationship between the price level and real GDP in the short run.
- **Aggregate Demand Curves**:
- **AD₁**: A downward-sloping blue line, demonstrating the inverse relationship between the price level and real GDP for one demand scenario.
- **AD₂**: Another downward-sloping blue line, parallel to AD₁ but shifted to the right, representing an increase in aggregate demand.

- **Equilibrium Point (A)**:
- Marked by a star, located at the intersection of AD₁ and SRAS. It represents the equilibrium price level (~120) and real GDP (~400 billion dollars).

This chart effectively illustrates how different aggregate demand scenarios impact the economy's equilibrium price level and output in both the short and long run.

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