Question

The graph below depicts an economy where a dcline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession Fiscal Policy Price Level 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars) Instructions: Enter your answers as a whole number How much does aggregate demand need to change to restore the economy to il long-run equilibrium billion of the MPC IS 08. how much does government purchases need to change to shift aggregate demand by the amount you found in

Answer 1

a) Change in demand required = Change in price required x Change in GDP required

= From the graph= $ (100-80) x (400-320) Million = $ 160 million

b) If mpc = 0.8, this means for every 100 dollars , 80 is consumed and 20 saved.

Therefore, since the hike in demand needed is $160 million and mpc =0.8

This means government spending needed = (160,000,000) / (0.8) = $ 200,000,000

c) If mpc = 0.75

Therefore, government spending will be = $ (160,000,000) / 0.75 = $ 213,333,333

And the change in demand will be the same = $ 160,000,000