Question

Graph an economy where your actual output is above full employment output. Use the AD/SRAS and LRAS model. Label all axis and lines accurately. a. Identify your potential or full employment output, Yf or Qf. b. Identify the actual output and price level. c. Identify the phase of the business cycle, the economy is operating within and explain how you know. d. Actual output= $750 Million Potential output =$ 600 Million MPC= .5 i. Calculate MPS. (write the formula and show all work) ii. Calculate the Spending Multiplier (write the formula and show all work) iii. Calculate the Tax Multiplier (write the formula and show all work) iv. Identify the type of Fiscal Policy to fix this economic problem. v. Calculate the maximum change to government spending, if this were the only tool utilized. (write the formula and show all work) What direction is the change? vi. Calculate the maximum change to taxes, if this were the only tool utilized. (write the formula and show all work) What direction is the change? vii. Explain how the graph changes. What shifts, what happens to output, unemployment and price level, in the short run? 2. Based off your understanding of automatic stabilizers and the above economic problem. a. Draw a graph of the Government spending and Tax revenue model. i. Label the balanced budget point with the same value as the full employment output above. ii. Label a point on the graph to show what happens when the actual output is below the full employment output. iii. State if the budget is balanced, in a deficit or in a surplus. Explain. iv. Based off the policy in d (v), explain the effect on the budget. 3. Draw the Loanable funds market in equilibrium and label the axis and curves accurately. a. Due to your answer in 2a (iv) explain how the market changes. i. Why does the market change? ii. What shifts and in which direction” iii. What happens to the real interest rate? iv. Based off the interest rate change, how will gross private investment change?

Answer 1