Show all the necessary steps and/or reasoning that lead to you answer. 1. Country ABC is...

 

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Show all the necessary steps and/or reasoning that lead to you answer. 1. Country ABC is experiencing the following situation. Its current aggregate demand is illustrated as AD, producing $10 trillion worth of output. Suppose that the full employment output level/potential output of this country is 12 trillion. Suppose MPS=0.1 and MPI=0.1 ABC P X 10 12 14 AS AD AD' Y(in trillions of $) a) Does this economy have an inflationary output gap or recessionary output gap? How much? Label the output gap on the above diagram. b) If you were the finance minister, what would be the fiscal policies that you might use to restore full employment output level? (There should be at least 3 options. Briefly describe how each option should be implemented) c) If you were to increase the AD, how large should the increase in the AD be if you were to achieve the full employment? $2 trillion? $4 trillion? Why? d) For each of the 3 fiscal policies in question b), calculate the size of change in each policy instrument to achieve full employment. Show your steps carefully. Show all the necessary steps and/or reasoning that lead to you answer. 1. Country ABC is experiencing the following situation. Its current aggregate demand is illustrated as AD, producing $10 trillion worth of output. Suppose that the full employment output level/potential output of this country is 12 trillion. Suppose MPS=0.1 and MPI=0.1 ABC P X 10 12 14 AS AD AD' Y(in trillions of $) a) Does this economy have an inflationary output gap or recessionary output gap? How much? Label the output gap on the above diagram. b) If you were the finance minister, what would be the fiscal policies that you might use to restore full employment output level? (There should be at least 3 options. Briefly describe how each option should be implemented) c) If you were to increase the AD, how large should the increase in the AD be if you were to achieve the full employment? $2 trillion? $4 trillion? Why? d) For each of the 3 fiscal policies in question b), calculate the size of change in each policy instrument to achieve full employment. Show your steps carefully.

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Lets tackle each part of the question step by step a An inflationary output gap occurs when the actual output is greater than the potential output while a recessionary output gap occurs when the actua... View the full answer