Price level1801701602 &&&RS R150140110120110100907060500LRASA. $1 billionB. $1.5 billionC. $2 billion.D. $3 billionReal GDP (Billions ofdollars)AD₁10ASAD₂1112An economy is initially in long-run equilibrium with a price level of 100 and real GDP of $5billion. Then, an increase in demand for exports shifts demand from AD; to AD₂. This causes GDPto increase to $7 billion and the price level to increase to 110. The federal government decidesto cut government spending in order to return to the long-run equilibrium and price level. Themarginal propensity to consume is 0.5. How much should the government reduce spending by?

An economy is initially in long run equilibrium with a price level of 100 and real GDP of $5…

Re An economy is initially in long-run billion. Then, an increase in demam to increase to $7 billion and the pri to cut government spending in ord marginal propensity to consume is A. $1 billion. B. $1.5 billion C. $2 billion. D. $3 billion

Re An economy is initially in long-run billion. Then, an increase in demam to increase to $7 billion and the pri to cut government spending in ord marginal propensity to consume is A. $1 billion. B. $1.5 billion C. $2 billion. D. $3 billion

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Price level
180
170
160
2 &&&RS R
150
140
110
120
110
100
90
70
60
50
0
LRAS
A. $1 billion
B. $1.5 billion
C. $2 billion.
D. $3 billion
Real GDP (Billions of
dollars)
AD₁
10
AS
AD₂
11
12
An economy is initially in long-run equilibrium with a price level of 100 and real GDP of $5
billion. Then, an increase in demand for exports shifts demand from AD; to AD₂. This causes GDP
to increase to $7 billion and the price level to increase to 110. The federal government decides
to cut government spending in order to return to the long-run equilibrium and price level. The
marginal propensity to consume is 0.5. How much should the government reduce spending by?

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1.The spending multiplier effect becomes bigger if a. the MPC becomes bigger and the MPM becomes smaller b. both the MPC and the MPM become bigger c. both the MPC and the MPM become smaller d. the MPC becomes smaller and the MPM becomes bigger 2. "The U.S. Department of Commerce has estimated that if U.S. manufacturers use metric measures, their increased ability to compete on world markets should increase exports by about $600 million and thus benefit the U.S. economy by between $1.2 billion and $1.8 billion." These numbers suggest that a. exports have a much smaller multiplier impact than other kinds of spending. b. the export spending multiplier is between 2 and 3. c. it takes between $1.2 and $1.8 billion increase in income to generate a $600 million increase in exports. d. imports should increase by between $1.2 and $1.8 billion. 3. The functions of the Federal Reserve System include all of the following, except: a.controlling the money supply b. promoting the stability of the…