The graph shows an economy below full employment. To restore full employment, the government increases government expenditure by $0.5 trillion. Draw a curve to show the effect of the increase if it is the only change in spending plans. Label the curve AD+AE. The increase in government expenditure sets off a multiplier process. Draw a curve that shows the multiplier effect that returns the economy to full employment. Label it AD₁. Draw a point at the full-employment equilibrium. 130- 120- Price level (GDP price index, 2012-100) 110- 105 100- 90- 80- 17.5 Potential GOP 19 18.5 19.5 ADO 20.5 Q G AS 21.5 Real GDP (trillions of 2012 dollars) >>> Draw only the objects specified in the question.
The graph shows an economy below full employment. To restore full employment, the government increases government expenditure by $0.5 trillion. Draw a curve to show the effect of the increase if it is the only change in spending plans. Label the curve AD+AE. The increase in government expenditure sets off a multiplier process. Draw a curve that shows the multiplier effect that returns the economy to full employment. Label it AD₁. Draw a point at the full-employment equilibrium. 130- 120- Price level (GDP price index, 2012-100) 110- 105 100- 90- 80- 17.5 Potential GOP 19 18.5 19.5 ADO 20.5 Q G AS 21.5 Real GDP (trillions of 2012 dollars) >>> Draw only the objects specified in the question.
Chapter11: Managing Aggregate Demand: Fiscal Policy
Section: Chapter Questions
Problem 1TY
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Transcribed Image Text:The graph shows an economy below full employment.
To restore full employment, the government increases government expenditure by $0.5 trillion.
Draw a curve to show the effect of the increase if it is the only change in spending plans. Label
the curve AD+AE.
The increase in government expenditure sets off a multiplier process. Draw a curve that shows
the multiplier effect that returns the economy to full employment. Label it AD₁.
Draw a point at the full-employment equilibrium.
130-
120-
Price level (GDP price index, 2012-100)
110-
105
100-
90-
80-
17.5
Potential GOP
19
18.5
19.5
ADO
20.5
Q
G
AS
21.5
Real GDP (trillions of 2012 dollars)
>>> Draw only the objects specified in the question.
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