Short Description Fiscal Policy Graph Details Shown is a Fiscal Policy diagram with the variable Real GDP (billions of dollars) on the x-axis and the variable Price Level on the y-axis. The x-axis is scaled from 0 to 800 billion dollars with an increment of 40 billion dollars, and the y-axis is scaled from 30 to 150 units with an increment of 5 units. Object Details On the graph we have:Four Line Objects:An upward sloping Aggregate Supply, AS line with two endpoints:Point 1 at (160, 70)Point 2 at (720, 140)A downward sloping Aggregate Demand, AD1 line with two endpoints:Point 1 at (80, 110)Point 2 at (640, 40)A vertical Long-run Aggregate Supply, LRAS with two endpoints:Point 1 at (400, 145)Point 2 at (400, 30)A downward sloping Aggregate Demand, AD line with two endpoints:Point 1 at (720, 60)Point 2 at (160, 130)Two Reference Points:Lines AS, AD, and LRAS intersect at (400, 100)Lines AS and AD1 intersect at (280, 85) a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.6, how much do taxes need to change to shift aggregate demand by the amount you found in part a? $ billion Suppose instead that the MPC is 0.75. c. How much does aggregate demand and taxes need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and taxes need to change by $ billion.

Short Description

Fiscal Policy

Graph Details

Shown is a Fiscal Policy diagram with the variable Real GDP (billions of dollars) on the x-axis and the variable Price Level on the y-axis.

The x-axis is scaled from 0 to 800 billion dollars with an increment of 40 billion dollars, and the y-axis is scaled from 30 to 150 units with an increment of 5 units.

Object Details

On the graph we have:
Four Line Objects:
An upward sloping Aggregate Supply, AS line with two endpoints:
Point 1 at (160, 70)
Point 2 at (720, 140)
A downward sloping Aggregate Demand, AD₁ line with two endpoints:
Point 1 at (80, 110)
Point 2 at (640, 40)
A vertical Long-run Aggregate Supply, LRAS with two endpoints:
Point 1 at (400, 145)
Point 2 at (400, 30)
A downward sloping Aggregate Demand, AD line with two endpoints:
Point 1 at (720, 60)
Point 2 at (160, 130)
Two Reference Points:
Lines AS, AD, and LRAS intersect at (400, 100)
Lines AS and AD₁ intersect at (280, 85)

a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium?

$ billion

b. If the MPC is 0.6, how much do taxes need to change to shift aggregate demand by the amount you found in part a?

$ billion

Suppose instead that the MPC is 0.75.

c. How much does aggregate demand and taxes need to change to restore the economy to its long-run equilibrium?

Aggregate demand needs to change by $ billion and taxes need to change by $ billion.