Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap. a. Given that full employment exists at $4,500, does a recessionary gap or an inflationary gap exist? (Click to select) b. Identify this gap in the diagram below. Instructions: (1) Use the tool provided 'Gap' to show this expenditure gap. This will display a two-ended arrow. Drag one end of the arrow to the lowest value of the expenditure gap and drag the other end to the highest value of the gap. Full employment 6000 5000 4000 3000 2000 1000 0 45° AE? Aggregate expenditures (billions of dollars) 1000 2000 3000 4000 5000 6000 Real GDP (billions of dollars)
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To determine whether a recessionary gap or an inflationary gap exists, we need to compare the current level of aggregate expenditures (AE) with the level of AE that would be required to achieve full employment output (Y*). If AE is less than Y*, then there is a Show more…
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(For students who were assigned Chapter 28 ) Use the aggregate expenditures model to show how government fiscal policy could eliminate either a recessionary expenditure gap or an inflationary expenditure gap (Figure 28.7 ). Explain how equal-size increases in $G$ and $T$ could eliminate a recessionary gap and how equal-size decreases in $G$ and $T$ could eliminate an inflationary gap.
Suppose Kittyville's full-employment GDP is $600 billion, and the current equilibrium GDP is $400 billion. The MPC in this economy equals 0.90. Identify the type of expenditure gap in Kittyville's economy. To correct this gap, Kittyville hires an economist, Kittyzen Keynes, who suggests increasing government spending or decreasing taxes. Answer Bank: inflationary increasing recessionary decreasing Suppose Kittyville decides to change government spending under Keynes' advice. By how much must government spending change to correct for the expenditure gap (rounded to nearest billion dollars)? $ 22.22 billion dollars
Jennifer S.
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