**Using the Aggregate Expenditures Model**To understand how government fiscal policy can eliminate a recessionary expenditure gap or an inflationary expenditure gap, consider the following graph and questions:### Graph Explanation:- **Axes**: The x-axis represents Real GDP in billions of dollars, ranging from 0 to 6000. The y-axis represents Aggregate Expenditures (also in billions of dollars), from 0 to 6000.- **Lines**: - **AE₀ (Aggregate Expenditures Line)**: The blue line that represents the aggregate expenditures at various levels of real GDP. - **45° Line**: The grey line representing points where aggregate expenditures equal real GDP (Y = AE). - **Full Employment**: Indicated by a dashed vertical line at $4500 billion on the x-axis.### Questions:#### a. Gap Existence:- Determine whether a recessionary or inflationary gap exists, given that full employment is at $4500 billion.#### b. Identifying the Gap:- **Instructions**: Use the provided "Gap" tool to illustrate the expenditure gap. The tool shows a two-ended arrow; adjust it to cover the range of the expenditure gap.#### c. Calculating the Gap:- Determine the dollar amount of the expenditure gap.Enter your results in the interactive fields provided.

Full employment level refers to the total output produced by the economy with the given amount of resources. a. Recessionary gaps occurs when the actual output level is less than the full employment level. Whereas, the inflationary gap occurs when the actual output level is more than the full employment level of the economy. The actual output level produced is $3,000 billion while the full employment output level is $4,500 billion. Since the actual GDP falls short of the full employment GDP, that is, $3,000 billion<$4,500 billion, there exists a recessionary gap in the economy. b. The recessionary gap is illustrated in the following diagram: c. Determine the recessionary gap by subtracting the actual GDP from the full employment GDP. Recessionary Gap=Full Employment GDP-Actual GDP =$4,500 Billion-$3,000 Billion =$1,500 Billion Thus, the expenditure gap is equal to $1,500 billion.

Business

Economics

Using the aggregate expenditures model, answer the questions below to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap. Full employment 6000 Tools 5 5000 Gap 54000 3000 2000 1000 45° 1000 2000 3000 4000 5000 6000 Real GDP (billions of dollars) a. Given that full employment exists at $4,500 billion, does a recessionary gap or an inflationary gap exist? (Click to select) b. Identify this gap using the diagram above. Instructions: (1) Use the tool provided 'Gap' to show this expenditure gap. The tool will display a two- ended arrow. Drag one end of the arrow to the lowest value of the expenditure gap and drag the other end to the highest value of the gap. c. What is the dollar amount of the expenditure gap? billion Aggregate expenditures (billions of dollars)

Using the aggregate expenditures model, answer the questions below to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap. Full employment 6000 Tools 5 5000 Gap 54000 3000 2000 1000 45° 1000 2000 3000 4000 5000 6000 Real GDP (billions of dollars) a. Given that full employment exists at $4,500 billion, does a recessionary gap or an inflationary gap exist? (Click to select) b. Identify this gap using the diagram above. Instructions: (1) Use the tool provided 'Gap' to show this expenditure gap. The tool will display a two- ended arrow. Drag one end of the arrow to the lowest value of the expenditure gap and drag the other end to the highest value of the gap. c. What is the dollar amount of the expenditure gap? billion Aggregate expenditures (billions of dollars)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

TOPIC: Deriving and exploring the total expenditures curve
With reference to 'Automatic Fiscal Stabilisers (AFS) Define what you understand by the term Automatic Fiscal Stabilisers and provide an explanation as to how 'Automatic Fiscal Stabilisers may work within the UK economy. What would be the problems that may arise when automatic stabilisers begin to take effect. Use diagrams if needed.
3. Explain how expansionary fiscal policy can close a recessionary gap using an appropriate diagram. Note: Use the following terms. They are: Long-run aggregate supply curve (LRAS). short-run aggregate supply curve (SRAS), Aggregate demand (AD). Real GDP price level. potential GDP, etc.
5. In an economy, the MPC is 0.5. The graph on the right depicts the economy's aggregate demand curve. Suppose the economy starts out at Point A on the aggregate demand curve. Draw the AE curve for this case. a. b. C. d. Suppose an increase in the price level causes the economy to move to Point B on the aggregate demand curve. Draw the new AE curve. Suppose government spending decreases by $0.2T. Draw the new AD curve. In place of the change in part (c), suppose net taxes decrease by $0.2T. Draw the new AD curve. Price Level (P) 170 160 150 140 130 120 110 100 90 80 70 60 AD 2.6 3.0 3.4 3.8 4.2 4.6 2.8 3.2 3.6 4.0 4.4 4.8 Y (T of $)
QUESTION 32 The government can use in the form of O a contractionary fiscal policy, a decrease in government spending Ob. an expansionary fiscal policy, an increase in government spending C. an expansionary fiscal policy, an increase in corporate taxes da contractionary fiscal policy, a reduction in taxes to decrease the level of aggregate demand in the economy.
4 HOMEY set of any of yes to $30 -0- -o- My ly Suppose that for every increase in the sterest rate ens peresage the end of westmant spending decies by 565 bon Based on the anes the level of investments to b Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to known as the by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (ADS) after accounting for the impact of the increase in government purchases on the interest rate and the level of…
6. Graphical treatment of taxes and fiscal policy The main difference between variable taxes and fixed taxes is that unlike fixed taxes, variable taxes The following graph shows the consumption schedule for an economy with a given level of taxes. Suppose the government implements a tax increase through a fixed tax. Use two green points (triangle symbol) to connect the two black points (plus symbols) representing the consumption schedule after the change in taxes. Hint: The new consumption schedule must pass through one point on the left and one point on the right. REAL CONSUMER SPENDING (Billions of dollars) 8 40 30 8 0 + + + O + ++ 20 40 60 REAL GDP (Billions of dollars) 80 + O + 100 Consumption with Tax Increase through a Fixed Tax Consumption with Tax Increase through a Variable Tax The blue line on the next graph represents the original total expenditure line for this economy before the change in tax structure. Use the new consumption line you just plotted to calculate the new…
uèstion 21 pounts The economy is in a recession. The government enacts a policy to increase the real GDP by $10 billion. The MPS is 0.2. Assuming that the agggregate supply curve is horizontal across the range of GDP being considered, by how much should the government change spending or taxes in order to achieve its objective? Show your calculations. e For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac). BIUS Paragraph Arial 10pt A v x X, Re v 55 OWORDS POWERED 図田 lili 用

Figure 16-7 Price level P3 a P₂ P₁ 0 LRAS A increase taxes LRAS 8 с Y₂ Ya contractionary fiscal policy O increase government spending O decrease interest rates SRAS₁ AD₁ SRAS AD₂ Refer to Figure 16-7. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP? Real GDP (trillions of dollars)
None
Suppose that the government allocates $1 billion for new roads. It also raises taxes by $1 billion to keep the deficit from growing. The absolute value of the government purchase multiplier is 3.33 and that of the tax multiplier is 2.33. What is the effect on equilibrium GDP? GDP does not change. ● GDP increases by $ 2.33 billion. GDP increases by $3.33 billion ⒸGDP increases by $1 billion.
Aggregate expenditure (billions of 2007 dollars) 375 347 150 100 10 0 100 200 45° line AE C 300 375 Real GDP (billions of 2007 dollars) 6. Using the graph above, assume there are no taxes in this economy. Answer the following questions: a. MPC = b. MPM = C. MP to Spend = =Z= d. AE Function = e. Multiplier = f. Equilibrium level of Real GDP is