The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to conduct fiscal policy by changing taxes to bring inflation under control. Fiscal Policy
The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to conduct fiscal policy by changing taxes to bring inflation under control. Fiscal Policy
Macroeconomics: Principles and Policy (MindTap Course List)
13th Edition
ISBN:9781305280601
Author:William J. Baumol, Alan S. Blinder
Publisher:William J. Baumol, Alan S. Blinder
Chapter6: How Statisticians Measure Inflation
Section6.A: How Statisticians Measure Inflation
Problem 6TY
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![The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides
to conduct fiscal policy by changing taxes to bring inflation under control.
Price Level
180
160
140
120
100
80
60
40
0
Fiscal Policy
LRAS
AD
AS
Real GDP (billions of dollars)
AD₁
100 200 300 400 500 600 700 800
Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign.
a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium?
$ (300) ► billion
b. If the MPC is 0.667, how much do taxes need to change to shift aggregate demand by the amount you found in part a?
$
billion
Suppose instead that the MPC is 0.75.
c. How much does aggregate demand and taxes need to change to restore the economy to its long-run equilibrium?
Aggregate demand needs to change by $ (300) billion and taxes need to change by $ 100 billion.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F17848948-ac9c-45f0-9a3b-2c29ff3a905c%2F2005d519-2e27-4379-9aa4-8092339510f3%2Fk3ivc2k_processed.png&w=3840&q=75)
Transcribed Image Text:The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides
to conduct fiscal policy by changing taxes to bring inflation under control.
Price Level
180
160
140
120
100
80
60
40
0
Fiscal Policy
LRAS
AD
AS
Real GDP (billions of dollars)
AD₁
100 200 300 400 500 600 700 800
Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign.
a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium?
$ (300) ► billion
b. If the MPC is 0.667, how much do taxes need to change to shift aggregate demand by the amount you found in part a?
$
billion
Suppose instead that the MPC is 0.75.
c. How much does aggregate demand and taxes need to change to restore the economy to its long-run equilibrium?
Aggregate demand needs to change by $ (300) billion and taxes need to change by $ 100 billion.
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