The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decidesto conduct fiscal policy by decreasing government purchases to restore full-employment GDP0Price Level180160140120100806040200Fiscal PolicyLRASASAD100 200 300 400 500 600 700 800 900 1000Real GDP (billions of dollars) 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?$billionb. If the MPC is 0.75, how much does government purchases need to change to shift aggregate demand by the amount you found inpart a?billionSuppose instead that the MPC is 0.6.c. How much does aggregate demand and govemment purchases need to change to restore the economy to its long-run equilibrium?billion and government purchases need to change by $Aggregate demand needs to change by $[billion.

Given information: Initial long-run equilibrium occurs at the intersection point of LRAS, AS, and…

The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to conduct fiscal policy by decreasing government purchases to restore full-employment GDP 0 Price Level 180 160 140 120 100 80 60 40 20 Fiscal Policy LRAS AS AD AD₁

The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to conduct fiscal policy by decreasing government purchases to restore full-employment GDP 0 Price Level 180 160 140 120 100 80 60 40 20 Fiscal Policy LRAS AS AD AD₁

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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Question

The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides
to conduct fiscal policy by decreasing government purchases to restore full-employment GDP
0
Price Level
180
160
140
120
100
80
60
40
20
0
Fiscal Policy
LRAS
AS
AD
100 200 300 400 500 600 700 800 900 1000
Real GDP (billions of dollars)

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 does government purchases 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 govemment purchases need to change to restore the economy to its long-run equilibrium?
billion and government purchases need to change by $
Aggregate demand needs to change by $[
billion.

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