Suppose that AS/AD model is given by YP = $500 billion P = 200 – 0.1Y P = 20 + 0.4Y where YP is potential GDP, Y is real GDP in billion dollars and P is GDP deflator. By how much overall should government expenditures change to achieve potential GDP level if MPC = 0.8? Calculate the size of inflation/deflation associated with this fiscal policy action. Present graphical interpretation of the problem.

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To achieve potential GDP level government expenditures should change by an amount that shifts the aggregate demand curve to the right by an amount equ... View the full answer