Connect Secure https://newconnect.mheducation.com/flow/connect.html HW ill FL 17

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Connect Secure https://newconnect.mheducation.com/flow/connect.html HW ill FL 17 Help Save &Exlt; Submit Check my work 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 taxes to reduce the burden of this recession. Fiscal Policy 3.33 200 180 160 140 Reference: 100 80 60 40 20 AD Real GDP (billions of dollars) Instructions: Include negative sign if necessary. How much doe$ aggregate cemend need to change to restore the economy to its long-run equilibrium?

Explanation / Answer

Answer a

The AD was 440 and now it is reduced to 280, hence the AD shall increase by 160 to restore the economy in the long run.

Answer b

Multiplier = 1/MPS =(1)/(1-.075) = 1/0.25=4

As demand neds to increase by 160,

The tax shall change by (160/4)= 40

Answer c

AD must increase by $160 billion and taxes must change by {(160)/[1/(1-0.6)]}={160 /[1/0.40]} ={160 / 2.5}=64

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