MACRO ECON 6
6th Edition
ISBN: 9780357689820
Author: MCEACHERN
Publisher: CENGAGE L
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Question
Chapter 11, Problem 8P
To determine
The economy with an expansionary gap.
Concept Introduction:
Fiscal Policy: Fiscal policy is the policy by which government regulates the nation’s economy by adjusting the government spending and controlling the tax rates. It tries to influence the demand side of the economy.
Recessionary Gap: Recessionary Gap is the gap between actual output and potential output under full employment situation when actual output is less than potential output.
Expansionary Gap: Expansionary Gap is the gap between actual output and potential output under full employment situation when actual output is more than potential output.
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The following graph shows a decrease in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the left from AD1AD1 to AD2AD2, causing the quantity of output demanded to fall at all price levels. For example, at a price level of 140, output is now $200 billion, where previously it was $300 billion.
The following table lists several determinants of aggregate demand.
Complete the table by indicating the change in each determinant necessary to decrease aggregate demand.
Change needed to decrease AD
Wealth
(increase/ decrease)
Taxes
(increase/ decrease)
Expected rate of return on investment
(increase/ decrease)
Incomes in other countries
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Determinants of aggregate demand
The following graph shows a decrease in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the left from AD1AD1 to AD2AD2, causing the quantity of output demanded to fall at all price levels. For example, at a price level of 140, output is now $200 billion, where previously it was $300 billion.
Suppose that the price level is constant and that investment decreases sharply. How would you show this decrease in the aggregate expenditures model? What would be the outcome for real GDP? How would you show this fall in investment in the aggregate demand–aggregate supply model, assuming the economy is operating in what, in effect, is a horizontal section of the aggregate supply curve?
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