**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, where aggregate supply is offset by total demand. The prices will frequently increase as a result. An excess of money seeking a few items or goods is a common way to represent an oddity. It usually happens as a result of strong consumer demand. Solution:-

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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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