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.

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.

The graph below depicts an economy where a decline in aggregate demand has caused a ression. Assume the government decides to

Instructions: Enter your answers as a whole number. If you are entering any negative numbers be sure to include a negative sign (-) in

front of those numbers.

a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium?

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?

Suppose instead that the MPC is 0.8.

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 $_______ billion.

Expert Solution

A) Aggregate Demand needs to be increased by 520-280=240 billion

b) If mpc=0.75 then tax multiplier= -Mpc/1-Mpc=-0.75/1-0.75=-3

Tax should be reduced by 80 billion

c)MPC=0.8 then Govt. expenditure multiplier=1/1-Mpc=1/1-0.8=5 and tax multiplier=-Mpc/1-Mpc=-0.8/0.2=4

AD needs to be increased by 240 billion and Taxes needs to be change/decrease by 60 billion

Rahul Sunny answered 2 years ago

When the government decides to apply expansionary fiscal policy A. Aggregate demand curve shifts to the...

When the government decides to apply expansionary fiscal policy A. Aggregate demand curve shifts to the right. B. Aggregate supply curve shifts to the right. C. Aggregate supply curve shifts to the right. D. Consumer price index remains the same.

Assuming the government of a typical economy decides to reduce their fiscal deficit by executing a fiscal deficit reduction (or rather contraction fiscal policy).

Assuming the government of a typical economy decides to reduce their fiscal deficit by executing a fiscal deficit reduction (or rather contraction fiscal policy). Based on your understanding of the concept Investment = Savings + (Tax - Govt. Spending) or I = S + (T-G) in an economy as well as spending multiplier, how will such decision by the government impact the level of investment, savings and output level (or income level) in the economy?

3. LIST THE THREE FISCAL POLICY ACTIONS THE FEDERAL GOVERNMENT CAN DO TO REDUCE AGGREGATE DEMAND...

3. LIST THE THREE FISCAL POLICY ACTIONS THE FEDERAL GOVERNMENT CAN DO TO REDUCE AGGREGATE DEMAND TO LESSEN INFLATION. 1. 2. 3. 4. LIST THE THREE FISCAL POLICY ACTIONS THE FEDERAL GOVERNMENT CAN DO TO INCREASE AGGREGATE DEMAND TO LESSEN UNEMPLOYMENT. 1. 2. 3. 5. A CONSTITIONAL AMENDMENT HAS BEEN PROPOSED THAT WOULD REQUIRE CONGRESS TO BALANCE THE BUDGET EACH YEAR. IS IT POSSIBLE TO BALANCE THE BUDGET EACH YEAR? Yes or No IS...

Question

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.

Solutions

Expert Solution

Related Solutions

When the government decides to apply expansionary fiscal policy A. Aggregate demand curve shifts to the...

Assuming the government of a typical economy decides to reduce their fiscal deficit by executing a fiscal deficit reduction (or rather contraction fiscal policy).

3. LIST THE THREE FISCAL POLICY ACTIONS THE FEDERAL GOVERNMENT CAN DO TO REDUCE AGGREGATE DEMAND...