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
Chapter1: Making Economics Decisions
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![**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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F291697d1-a703-449a-ab9b-b55955cb3467%2Fda8cf3eb-89c2-4ba7-82fd-dfe5d6668a44%2Fwaqvzr_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**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 __________.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F291697d1-a703-449a-ab9b-b55955cb3467%2Fda8cf3eb-89c2-4ba7-82fd-dfe5d6668a44%2Fc4g96sa_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**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 __________.
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