Suppose the economy is in recession. Policymakers estimate that aggregate demand is $100 billion short of the amount necessary to generate the long run natural rate of output. That is, if aggregate demand were shifted to the right by $100 billion, the economy would be in long run equilibrium. a. Explain the impact on the economy if the government chooses to use fiscal policy to stabilize the economy and the marginal propensity to consume (MPC) is given as 0.75 with no crowding out.
Suppose the economy is in recession. Policymakers estimate that aggregate demand is $100 billion short of the amount necessary to generate the long run natural rate of output. That is, if aggregate demand were shifted to the right by $100 billion, the economy would be in long run equilibrium. a. Explain the impact on the economy if the government chooses to use fiscal policy to stabilize the economy and the marginal propensity to consume (MPC) is given as 0.75 with no crowding out.
Chapter24: Fiscal Policy
Section: Chapter Questions
Problem 5P
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Suppose the economy is in recession. Policymakers estimate that aggregate demand is
$100 billion short of the amount necessary to generate the long run natural rate of output.
That is, if aggregate demand were shifted to the right by $100 billion, the economy would
be in long run equilibrium.
a. Explain the impact on the economy if the government chooses to use fiscal policy to
stabilize the economy and the marginal propensity to consume (MPC) is given as
0.75 with no crowding out.
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