polsHomework (Ch 15)4. Using fiscal policy to fight inflationConsider the hypothetical economy depicted on the graph. Initially, the economy operates below full-employment output at a price level of 105 andreal GDP of $480 billion. Then aggregate demand (AD) increases from AD₁ to AD₂, moving the economy up along the intermediate and classicalranges of the aggregate supply (AS) curve. Real GDP increases to the full-employment output level of $540 billion, and the price level increases to120.PRICE LEVEL (CPI)13012512011511010095908580400420440ASAD₂460REAL GDP (Billions of dollars)AD₁480 500 520 540 560 580600MacBook Pro(?)X CENGAGE MINDTAPHomework (Ch 15)PRICE LEVEL (CPI)12512011511010510095908580400 420 440ASAD₂The increase in aggregate demand from AD₁ to AD2 causes,AD460 480 500 520 540 560 580 600REAL GDP (Billions of dollars)inflation.Suppose the marginal propensity to consume (MPC) is 0.90. The government wants to avoid the double-digit inflation associated with the shift fromAD₁ to AD₂. The lowest possible price level associated with full-employment output is 110. To achieve a price level of 110 and full-employmentoutput, the government must enact a fiscal policy that reduces aggregate demand by $40 billion at each price level.To reduce aggregate demand by $40 billion, the government cangovernment expenditures byIf the government wants to use a change in tax policy instead to reduce aggregate demand by $40 billion, it shouldtaxes byQ Search this caⓇ

The phrase "demand-pull inflation" refers to economic inflation that is driven by consumer demand,…

pols Homework (Ch 15) 4. Using fiscal policy to fight inflation Consider the hypothetical economy depicted on the graph. Initially, the economy operates below full-employment output at a price level of 105 and real GDP of $480 billion. Then aggregate demand (AD) increases from AD₁ to AD₂, moving the economy up along the intermediate and classical ranges of the aggregate supply (AS) curve. Real GDP increases to the full-employment output level of $540 billion, and the price level increases to 120. PRICE LEVEL (CPI) 130 125 120 115 110 100 95 90 85 80 400 420 440 AS AD₂ 460 REAL GDP (Billions of dollars) 480 500 520 540 560 580 AD₁ 600 MacBook Pro (?) X

pols Homework (Ch 15) 4. Using fiscal policy to fight inflation Consider the hypothetical economy depicted on the graph. Initially, the economy operates below full-employment output at a price level of 105 and real GDP of $480 billion. Then aggregate demand (AD) increases from AD₁ to AD₂, moving the economy up along the intermediate and classical ranges of the aggregate supply (AS) curve. Real GDP increases to the full-employment output level of $540 billion, and the price level increases to 120. PRICE LEVEL (CPI) 130 125 120 115 110 100 95 90 85 80 400 420 440 AS AD₂ 460 REAL GDP (Billions of dollars) 480 500 520 540 560 580 AD₁ 600 MacBook Pro (?) X

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Six Debates Over Macroeconomic Policy

Section: Chapter Questions

Problem 2CQQ

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Similar questions

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