Let's say you are the chair of economic advisors to the president.  Assume that the economy, as depicted in an AD/AS framework is at: potential (full employment) output,  The intersection of the SRAD, SRAS, and LRAS, all intersect at the level of potential (full employment) output and a corresponding price level ( or an acceptable rate of inflation).  The economy's mpc is .75, which is presumed to remain constant.  

Now, global problems emerge, and the US decided to produce many new fighter jets immediately to the region under duress.  The new jets will cost $55 b., and other expenditures by the government cannot be cut.   The president is concerned that the new expenditures will create an inflation, but needs to produce the new jets immediately.  What policies would you propose, that  would enable the country to produce the new jets, without creating an inflation?  Use the AD/AS framework to illustrate your answer.  Assume any taxes are lump sum taxes.  Specify the spending and taxing amounts, if any, and also illustrate your answer with a graph, explaining the movements of all curves.

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In this scenario the economy is at its potential output which means it is operating at full employme... View the full answer