**Homework (Ch 15)****4. Using fiscal policy to fight inflation**Consider the hypothetical economy depicted on the graph. Initially, the economy operates below full-employment output at a price level of 105 and real GDP of $480 billion. Then aggregate demand (AD) increases from AD₁ to AD₂, moving the economy up along the intermediate and classical ranges of the aggregate supply (AS) curve. Real GDP increases to the full-employment output level of $540 billion, and the price level increases to 120.**Graph Explanation:**The graph depicts a macroeconomic scenario involving aggregate demand and aggregate supply:- **Axes:** - The vertical axis represents the Price Level (CPI). - The horizontal axis represents Real GDP (Billions of dollars).- **Curves:** - **AS (Aggregate Supply):** An upward sloping blue line, illustrating the relationship between price level and the quantity of goods and services supplied. - **AD₁ (Initial Aggregate Demand):** A downward sloping blue line on the left, showing the initial position of aggregate demand with a real GDP of $480 billion and a price level of 105. - **AD₂ (New Aggregate Demand):** A downward sloping blue line on the right, indicating the new position of aggregate demand after an increase, reaching a real GDP of $540 billion and a price level of 120.- **Key Points:** - The initial equilibrium is at the intersection of AD₁ and AS at a price level of 105 and real GDP of $480 billion. - The new equilibrium occurs at the intersection of AD₂ and AS at a price level of 120 and real GDP of $540 billion. This reflects the move to full-employment output. **Title: Economic Analysis: Aggregate Demand and Supply****Graph Explanation:**The graph illustrates the Aggregate Supply (AS) curve and two Aggregate Demand (AD) curves, labeled $AD_1$ and $AD_2$. - **X-axis:** Represents Real GDP (Billions of dollars), ranging from 400 to 600.- **Y-axis:** Represents the Price Level (CPI), ranging from 80 to 125. - **AS Curve (Blue Line):** Shows the relationship between the price level and the quantity of output firms are willing to produce. - **AD Curves (Orange Lines):** - $AD_1$ starts at a lower quantity of Real GDP and shifts to $AD_2$, indicating an increase in aggregate demand.Black dashed lines illustrate equilibrium points on both price and Real GDP axes.**Text:**The increase in aggregate demand from $AD_1$ to $AD_2$ causes __________ inflation.Suppose the marginal propensity to consume (MPC) is 0.90. The government wants to avoid the double-digit inflation associated with the shift from $AD_1$ to $AD_2$. The lowest possible price level associated with full-employment output is 110. To achieve a price level of 110 and full-employment output, the government must enact a fiscal policy that reduces aggregate demand by $40 billion at each price level.To reduce aggregate demand by $40 billion, the government can __________ government expenditures by __________.If the government wants to use a change in tax policy instead to reduce aggregate demand by $40 billion, it should __________ taxes by __________.

The phrase "demand-pull inflation" refers to economic inflation that is driven by consumer demand,…

pols Homework (Ch 15) 4. Using fiscal policy to fight inflation Consider the hypothetical economy depicted on the graph. Initially, the economy operates below full-employment output at a price level of 105 and real GDP of $480 billion. Then aggregate demand (AD) increases from AD₁ to AD₂, moving the economy up along the intermediate and classical ranges of the aggregate supply (AS) curve. Real GDP increases to the full-employment output level of $540 billion, and the price level increases to 120. PRICE LEVEL (CPI) 130 125 120 115 110 100 95 90 85 80 400 420 440 AS AD₂ 460 REAL GDP (Billions of dollars) 480 500 520 540 560 580 AD₁ 600 MacBook Pro (?) X

pols Homework (Ch 15) 4. Using fiscal policy to fight inflation Consider the hypothetical economy depicted on the graph. Initially, the economy operates below full-employment output at a price level of 105 and real GDP of $480 billion. Then aggregate demand (AD) increases from AD₁ to AD₂, moving the economy up along the intermediate and classical ranges of the aggregate supply (AS) curve. Real GDP increases to the full-employment output level of $540 billion, and the price level increases to 120. PRICE LEVEL (CPI) 130 125 120 115 110 100 95 90 85 80 400 420 440 AS AD₂ 460 REAL GDP (Billions of dollars) 480 500 520 540 560 580 AD₁ 600 MacBook Pro (?) X

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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