Question

2. Discretionary fiscal policy and multiplier effects Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.5. The following graph shows the aggregate demand curves ($AD_1$ and $AD_2$), the short-run aggregate supply curve (SRAS), and the long-run aggregate supply curve (LRAS). The economy is currently at point A. PRICE LEVEL SRAS 124 AD1 AD 2 LRAS 140 136 132 128 124 120 116 112 108 400 500 600 700 800 900 1000 1100 1200 REAL GDP (Billions of dollars) The economy is currently experiencing gap of $ billion. government In order to close this gap, one option would be for the government to purchases by $ billion (assuming net taxes do not change).

          2. Discretionary fiscal policy and multiplier effects
Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.5. The
following graph shows the aggregate demand curves ($AD_1$ and $AD_2$), the short-run aggregate
supply curve (SRAS), and the long-run aggregate supply curve (LRAS). The economy is currently at
point A.
PRICE LEVEL
SRAS
124
AD1
AD 2
LRAS
140
136
132
128
124
120
116
112
108
400 500 600 700 800 900 1000 1100 1200
REAL GDP (Billions of dollars)
The economy is currently experiencing
gap of $
billion.
government
In order to close this gap, one option would be for the government to
purchases by $
billion (assuming net taxes do not change).

2. Discretionary fiscal policy and multiplier effects
Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.5. The
following graph shows the aggregate demand curves (AD1 and AD2), the short-run aggregate
supply curve (SRAS), and the long-run aggregate supply curve (LRAS). The economy is currently at
point A.
PRICE LEVEL
SRAS
124
AD1
AD 2
LRAS
140
136
132
128
124
120
116
112
108
400 500 600 700 800 900 1000 1100 1200
REAL GDP (Billions of dollars)
The economy is currently experiencing
gap of billion.
government
In order to close this gap, one option would be for the government to
purchases by
billion (assuming net taxes do not change).

Added by Lisa R.

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