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 Fiscal Policy 160 150 140 130 120 110 100 90 80 70 60 50 J 40 80 160 240 320 400 480 560 640 720 800 LRAS Real GDP (billions of dollars) AS AD₁ AD
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 Fiscal Policy 160 150 140 130 120 110 100 90 80 70 60 50 J 40 80 160 240 320 400 480 560 640 720 800 LRAS Real GDP (billions of dollars) AS AD₁ AD
Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter12: Fiscal Policy, Incentives, And Secondary Effects
Section: Chapter Questions
Problem 8CQ
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Question
![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?
$
billion
b. If the MPC is 0.80, 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 0.67.
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 $
billion and taxes need to change by $
billion.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F98162983-c946-4460-a59f-752c7d90605f%2Fa3f5ff6c-dd69-4491-b818-fb8486dd43c8%2F4r3iej_processed.png&w=3840&q=75)
Transcribed Image Text: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?
$
billion
b. If the MPC is 0.80, 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 0.67.
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 $
billion and taxes need to change by $
billion.
![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
Fiscal Policy
160
150
140
130
120
110
100
90
80
70
60
50
40
80 160 240 320 400 480 560 640 720 800
LRAS
Real GDP (billions of dollars)
AS
AD₁
AD](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F98162983-c946-4460-a59f-752c7d90605f%2Fa3f5ff6c-dd69-4491-b818-fb8486dd43c8%2Fr5jyyon_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
Fiscal Policy
160
150
140
130
120
110
100
90
80
70
60
50
40
80 160 240 320 400 480 560 640 720 800
LRAS
Real GDP (billions of dollars)
AS
AD₁
AD
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