Tills economy\'s output Is below potential output, so If the government wanted t

Question

Tills economy's output Is below potential output, so If the government wanted to take action to restore the economy to Its potential, the government would use fiscal policy, such as taxes. Suppose that the government could Implement Its chosen policy perfectly, restoring output exactly to Its potential. In this case, the AD curve would shift by at each price level, causing output to Increase to $600 billion and the price level to Use the green line (triangle symbols) to show the aggregate demand (AD) curve consistent with these changes. Be sure to plot the new AD such that It is parallel to AD1 and passes through the natural rate of output. (You can move your mouse over AD1 to see its slope.) Suppose that the marginal propensity to consume in this economy is 0.60, and assume, for simplicity, that there are no taxes or other factors that will decrease the multiplier effect of a change in government expenditures. To bring about the shift In aggregate demand just indicated via a change in government expenditures, the government will have to change its expenditures by

Explanation / Answer

As the economy's output is below potential output level, it implies the economy has still ability to produce more by employing unused resources. So, to restore the potential outpt, government would use expansionary fiscal policy such as reduces taxes.

Because government has implent its policy perfectly, more output would have been generated. Which means More demand would be there that is AD curve will rightward by leftward at each price level.

The other blanks could not be filled becuase image of diagram is not attached with the question.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.