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 increasing government purchases to reduce the burden of this recession. Fiscal Policy 160 LRAS AS Price Level 140 120 100 80 60 8 40 20 20 0 AD AD. 1 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars) Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.6, how much does government purchases need to change to shift aggregate demand by the amount you found in part a? billion Suppose instead that the MPC is 0.75.
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 increasing government purchases to reduce the burden of this recession. Fiscal Policy 160 LRAS AS Price Level 140 120 100 80 60 8 40 20 20 0 AD AD. 1 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars) Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.6, how much does government purchases need to change to shift aggregate demand by the amount you found in part a? billion Suppose instead that the MPC is 0.75.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text: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 increasing government purchases to reduce the burden of this recession.
Fiscal Policy
Price Level
160
LRAS
AS
140
120
100
80
60
40
20
0
AD 1
AD
80 160 240 320 400 480 560 640 720 800
Real GDP (billions of dollars)
Instructions: Enter your answers as a whole number.
a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium?
$
billion
b. If the MPC is 0.6, how much does government purchases need to change to shift aggregate demand by the amount you found in
part a?
EA
billion
Suppose instead that the MPC is 0.75.
c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium?
Aggregate demand needs to change by $
billion and government purchases need to change by $
billion.
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