Using relevant diagrams, illustrate and explain how an increase (decrease) in government spending of $10b would affect aggregate demand, output and price level in the economy. You should assume an upward sloped-aggregate supply curve.

Using relevant diagrams, illustrate and explain how an increase (decrease) in government spending of $10b would affect aggregate demand, output and price level in the economy. You should assume an upward sloped-aggregate supply curve.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter5: Introduction To Macroeconomics

Section: Chapter Questions

Problem 4.6P

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iv) Using relevant diagrams, illustrate and explain how an increase (decrease) in government spending of $10b would affect aggregate demand, output and price level in the economy. You should assume an upward sloped-aggregate supply curve.

Definition Definition Total supply of goods and services in an economy at a certain price level in a specific time period.

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1. Let us say the estimated equation for the economy's aggregate demand is Y=400 – 15P+ 8G And the estimated equation for the economy's aggregate supply is Y=5+11P-10W where Y is the country's real GDP, P is the price level (GDP deflator), G is government purchases of goods and services, and W is the index of wages. a. If G= 160 and W= 100, find the equilibrium real GDP and the price level in the economy. b. What is the simple multiplier in this economy? Give the number and explain how you figured it out. c. What is the inflation rate due to the government increasing its purchases from G=160 to G= 180 (expansionary fiscal policy), in %? d. What is the value of the multiplier when the price level varies? 2. Imagine an economy in which the slope of the AD curve is equal to the (negative of) slope of the AS curve. If the simple multiplier is equal to 5, what is the value of the multiplier when the price level varies? Give the number and explain how you figured it out.
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The following graph shows a hypothetical economy in long-run equilibrium at an expected price level of 120 and a natural output level of $600 billion. Suppose the government increases spending on building and repairing highways, bridges, and ports.
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Just question 1.D and #2! Thanks!