The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by changing taxes to reduce the burden of this recession. Fiscal Policy Price Level 200 180 160 140 120 100 80 60 40 20 0 LRAS AS Real GDP (billions of dollars) AD AD 1 80 160 240 320 400 480 560 640 720 800 O
The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by changing taxes to reduce the burden of this recession. Fiscal Policy Price Level 200 180 160 140 120 100 80 60 40 20 0 LRAS AS Real GDP (billions of dollars) AD AD 1 80 160 240 320 400 480 560 640 720 800 O
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Problem Solving - Taxes Exercise 2
The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government
decides to conduct fiscal policy by changing taxes to reduce the burden of this recession.
(0)
Fiscal Policy
Price Level
200
180
160
140
120
100
80
60
40
20
0
LRAS
AS
Real GDP (billions of dollars)
AD
AD 1
80 160 240 320 400 480 560 640 720 800

Transcribed Image Text:Instructions: Include a negative sign (-) if necessary.
a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium?
billion
b. Assuming the MPC in this nation is 0.5, how much do taxes need to change to shift aggregate demand by the amount you found in
part a?
$
billion
c. Now suppose the MPC is 0.8. To restore the economy to its long-run equilibrium, aggregate demand must be changed by $[
billion and taxes must be changed by $
billion.
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