1. Let the AD and AS be as follows: AD: Y = 700 – 15P +...

1. Let the AD and AS be as follows:

AD: Y = 700 – 15P + 10G

AS: Y = 10 + 12P – 10W

where Y is the real GDP, P is the price level (GDP deflator), G is government purchases, and W is the index of wages.

a. If G = 200 and W = 100, find the equilibrium real GDP and price level in the economy. (1)

b. What is the simple multiplier in this economy? (2)

c. If the government increases its purchases to G = 220, what are the new equilibrium real GDP and price level in the economy? (1)

d. What is the inflation rate due to the expansionary fiscal policy (increasing the government purchases from G = 200 to G = 220), in %? (1)

e. What is the multiplier in this economy when the price level varies? (2)

Expert Solution

Rahul Sunny answered 1 year ago

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