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The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by changing taxes to reduce the burden of this recession. Price Level 150 140 130 120 110 100 90 80 70 60 50 40 30 0 Fiscal Policy LRAS AS AD AD 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars)

The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by changing taxes to reduce the burden of this recession. Price Level 150 140 130 120 110 100 90 80 70 60 50 40 30 0 Fiscal Policy LRAS AS AD AD 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars)

Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter30: Government Budgets And Fiscal Policy
Section: Chapter Questions
Problem 30RQ: Under what general macroeconomic circumstances might a government use expansionary fiscal policy?...
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The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by changing taxes to reduce the burden of this recession. Price Level 150 140 130 120 110 100 90 80 70 60 50 40 30 0 Fiscal Policy LRAS AS Real GDP (billions of dollars) AD AD 80 160 240 320 400 480 560 640 720 800 O
Transcribed Image Text:The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by changing taxes to reduce the burden of this recession. Price Level 150 140 130 120 110 100 90 80 70 60 50 40 30 0 Fiscal Policy LRAS AS Real GDP (billions of dollars) AD AD 80 160 240 320 400 480 560 640 720 800 O
Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.75, how much do taxes need to change to shift aggregate demand by the amount you found in part a? $ billion Suppose instead that the MPC is 0.6. c. How much does aggregate demand and taxes need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and taxes need to change by $ ALA billion.
Transcribed Image Text:Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.75, how much do taxes need to change to shift aggregate demand by the amount you found in part a? $ billion Suppose instead that the MPC is 0.6. c. How much does aggregate demand and taxes need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and taxes need to change by $ ALA billion.
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