Use the Aggregate Demand – Aggregate Supply Model to demonstrate the effects of expansionary fiscal policy. Assume that the GDP is below full-employment GDP. Show the effects on both GDP and on prices. What are the results for GDP, prices, and unemployment? Explain.
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Use the Aggregate Demand –
expansionary fiscal policy. Assume that the
effects on both GDP and on prices. What are the results for GDP, prices, and
Explain.
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- DEFINE FISCAL POLICY. WOULD THE INCREASE OF $100 IN GOVERNMENT SPENDING HAVE THE SAME EFFECT ON GDP AS OF DECREASE IN TAXES OF $100? WHY OR WHY NOT?Cite the five major demand-side components of GDP. Then, identify the major elements affected by fiscal policy.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 toxes to reduce the burden of this recession. Fiscal Policy 140 LRAS AS 130 120 110 100 90 80 70 AD 60 50 AD, 40 80 160 240 320 400 480 560 640 720 800 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 oggregate demanci need to change to restore the economy to its long-run equilbrilum? billion b. If the MPC is 0.667, how much do taxes need to change to shift aggregate demand by the amount you found in part a? billion Suppose instead that the MPC is 0.5. 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. Price Level
- If the economy is in a recessionary period how, specifically, might the government use their three tools? three tools change the tax rate change the level of govertment spending change transfer paymentsWhy is income increased after "fiscal policy"? Why does our demand for income increase too?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. Price Level 180 160 140 120 100 80 60 40 20 0 Fiscal Policy LRAS AS AD 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? $ (200) 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? $ (50) → billion Suppose instead that the MPC is 0.6. c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ (200) billion and government purchases need to change by…
- Which of the following is an appropriate fiscal policy response to a negative GDP gap? a. raise income tax rates b. increase government spending c. raise real interest rates d. lower real interest ratesThe government is considering raising the tax rate on labor income and asks you to report on the supply-side effects of such an action. Use appropriate graphs and report directions of change, not exact magnitudes. What will happen to: i. The supply of labor ii. The demand for labor and why? Equilibrium employment and why? iii. iv. V. vi. The equilibrium before-tax wage rate and why? The equilibrium after-tax wage and why? Potential GDP?The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to conduct fiscal policy by changing taxes to bring inflation under control. Fiscal Policy 180 LRAS AS 160 140 120 100 AD, 80 60 AD 40 100 200 300 400 500 600 700 800 Real GDP (billions of dollars) istructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. Price Level
- What is meant by fiscal policy? How far can it be used to ensure, a high level of employment?What role taxes policy plays in determining the GDP or national income in an economy? Explain with numerical examples?The government is considering raising the tax rate on labor income. Explain the supply-side effects of such an action and use appropriate graphs to show the directions of change, not exact magnitudes. What will happen to: The supply of labor and why? The demand for labor and why? Equilibrium employment and why? The equilibrium before-tax wage rate and why? The equilibrium after-tax wage rate and why? Potential GDP? Explain your response with specifics and provide examples.
