The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to increase government purchases as fiscal policy to reduce the turned of this recession.

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

b. if the MPC in this nation is 0.75, how much does government purchases need to increase to shift aggregate demand by the amount you found in part a?

c. Suppose the MPC is 0.6. To restore the economy to its long-run, aggregate demand must be increased by $.......... billion and government purchases must be increased by $.............. billion.

Transcribed Image Text:

Price Level 160- 140- 120- 400 Fiscal Policy LRAS AD₁ 40 so no mo Real GOP (billions of dollars) Price Level 160- 140- 120- 400 Fiscal Policy LRAS AD₁ 40 so no mo Real GOP (billions of dollars)

Answer rating: 100% (QA)

a When economy was at full employment level with respect to aggregate demand curve AD the aggregate ... View the full answer