(?)120SRAS100AD80SRAS60LRAS40AD20100200300400500600REAL GDP (Index numbers)This economy's output ispotential output. To restore the economy to its potential, the government couldv fiscal policy.useShift either the AD curve or the SRAS curve to illustrate the changes consistent with the chosen government policy.Suppose that the marginal propensity to consume in this economy is 0.60. Assume, for simplicity, that there are no taxes or other factors that couldalter the multiplier effect of a change in government expenditures.The economy's expenditure multiplier iswhich means that the government must alter its expenditures byto restore outputto potential output.PRICE LEVEL (Billions of dollars) 5. Fiscal policy in the AD-AS model and the multiplier effectThe following graph shows a hypothetical economy that uses the dollar as its currency. The economy is in short-run equilibrium at an output level of300 billion and a price level of 60. Suppose that the economy's potential output is $400 billion.Use the purple line (diamond symbols) to plot the long-run aggregate supply (LRAS) curve on the graph.(?)120SRAS100AD80SRAS60LRAS40AD20100200300400500600REAL GDP (Index numbers)This economy's output ispotential output. To restore the economy to its potential, the government couldusefiscal policy.PRICE LEVEL (Billions of dollars)

The short run equilibrium is where the aggregate demand and short run aggregate supply curve…

This economy's output is potential output. To restore the economy to its potential, the government could use fiscal policy. Shift either the AD curve or the SRAS curve to illustrate the changes consistent with the chosen government policy. Suppose that the marginal propensity to consume in this economy is 0.60. Assume, for simplicity, that there are no taxes or other factors that could alter the multiplier effect of a change in government expenditures. The economy's expenditure multiplier is , which means that the government must alter its expenditures by to restore output to potential output.

This economy's output is potential output. To restore the economy to its potential, the government could use fiscal policy. Shift either the AD curve or the SRAS curve to illustrate the changes consistent with the chosen government policy. Suppose that the marginal propensity to consume in this economy is 0.60. Assume, for simplicity, that there are no taxes or other factors that could alter the multiplier effect of a change in government expenditures. The economy's expenditure multiplier is , which means that the government must alter its expenditures by to restore output to potential output.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.1P

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