2.) In 2010 the drilling rig Deepwater Horizon experienced a mechanical failure
ID: 1125780 • Letter: 2
Question
2.) In 2010 the drilling rig Deepwater Horizon experienced a mechanical failure that caused 49 million barrels o into the Gulf of Mexico. After the oil spill, it took 3 months for economists to determine how much real GDP affected regions. ognition Lag 3.) When President George W. Bush came into office in 2001, the Republican Congress, which supported his ta did not pass tax cuts until several months after Legislative Lag Problem Solving Part 4 Consider the economy of Florin, shown in the AD-AS graph. Initially, the economy of Florin was in long-run equilib increase in the demand for Florin's products in the nearby country of Guilder increased Florin's net exports, causing t demand curve to increase from AD, to AD Suppose the government of Florin wants to reduce aggregate demand enough to bring output back to the full-employ has decided to do so by raising income taxes on the people of Florin. AD and AS in Florin LRAS 120 110 AS, a 90 AD2 80 16 18 20 22 24 26 28 30 32 34 Real GDP (billions of dollars) Task 1: How much does aggregate demand need to fall to bring Florin back to full employment? Task 2: If the MPS is 0.25, how much do taxes need to change? Task 3: If instead the Government of Florin decides instead to change government spending and the MPS is 0.25, government spending need to change?Explanation / Answer
PART 4
Task 1
After shift of aggregate demand curve from AD1 to AD2, new short-run equilibrium real GDP is $30 billion and new equilibrium price level is 100.
With respect to new equilibrium price level and original aggregate demand curve, AD1, real GDP was $21 billion.
So,
Excess AD = $30 billion - $21 billion = $9 billion
Thus, aggregate demand needs to decrease by $9 billion to bring Florida back to full employment.
Task 2
In order to decrease aggregate demand, taxes has to be increased.
MPS = 0.25
MPC = 1 - MPS = 1 - 0.25 = 0.75
Multiplier = 1/MPS = 1/0.25 = 4
Calculate the desired fiscal restraint -
Desired fiscal restraint = Excess AD/Multiplier = $9 billion/4 = $2.25 billion
Desired increase in taxes = Desired fiscal restraint/MPC = $2.25 billion/0.75 = $3 billion
The taxes needs to be increased by $3 billion.
Task 3
MPS = 0.25
MPC = 1 - MPS = 1 - 0.25 = 0.75
Multiplier = 1/MPS = 1/0.25 = 4
Calculate the desired fiscal restraint -
Desired fiscal restraint = Excess AD/Multiplier = $9 billion/4 = $2.25 billion
The government spending has to be increased by $2.25 billion.
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