FiscalPolicy Ch22

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Florida International University *

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2013

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Economics

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Apr 3, 2024

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Name: Natalie Rodriguez ____ Course: ECO 2013 _____ Section: AM1 ____ FISCAL POLICY Price Level (Consumer Price Index) Aggregate Demand Real GDP (billions of dollars) Aggregate Supply Real GDP (billions of dollars) 80 $12 $ 4 90 $ 10 $ 6 100 $ 8 $ 8 110 $ 6 $ 10 120 $ 4 $ 12 Task 1 : Identify the macroeconomic equilibrium price level in this economy. The macroeconomic equilibrium price level is 100 Task 2 : Identify the macroeconomic equilibrium level of real GDP in this economy. The macroeconomic equilibrium level of real GDP is $8 billion Task 3 : If the full employment level of real GDP is $9 billion, is the economy experiencing an inflationary gap or a recessionary gap? Should it enact contractionary or expansionary fiscal policy? The current level of real GDP is below the full employment level of real GDP which indicates that this economy is in a recessionary gap. The economy should enact expansionary fiscal policy. Task 4 : Suppose that the government wants to promote full employment through the use of government purchases. Should it increase or decrease government purchases? Explain your answer carefully. The government should increase government purchases. This will increase AD and shift the AD curve to the right, leading to higher equilibrium real GDP. Task 5: Assume the MPC = 0.80. What is the multiplier? 1/ (1- 0.80) = 5 Task 6: Suppose that aggregate demand must increase by $2 billion to return the economy to its full employment level of output. How much should the government increase or decrease government purchases?

Name: Natalie Rodriguez ____ Course: ECO 2013 _____ Section: AM1 ____ $2 billion / 5 = $400 million The government needs to increase government purchases by $400 million. Task 7: Assume the MPC = 0.75. What is the multiplier? 1 / (1-0.75) = 4 Task 8: Suppose that aggregate demand must increase by $2 billion to return the economy to its full employment level of output. How much should the government increase or decrease government purchases? $2 billion / 4 = $500 million The government needs to increase government purchases by $500 million.

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