Question

Price Level (CPI) The hypothetical information in the following table shows what the situation will be in 2015 if the government does not use fiscal policy. 115 Potential Real Year GDP Real GDP Price Level 2014 2015 $1.52 trillion $1.57 trillion $1.52 trillion $1.52 trillion 106.0 108.3 a. If Parliament wants to keep real GDP at its potential level in 2015, it should use policy government purchases and/or The government should be taxes. 106 b. Parliament is successful in keeping real GDP at its potential level in 2015, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action. Assume that policy does not affect LRAS 104 103+ 1.50 1.52 1.54 1.56 1.58 Real GDP (trillions of dollars) it would have been if Parliament had taken no 1. Real GDP will be action. il. Potential real GDP will be taken no action it would have been if Parliament had Selected: none Delete Clear Click the graph, choose a tool in the palette and follow the instructions to create your graph.

Answer 1

A) As actual GDP is less than potential GDP showing lower aggregate demand than potential GDP ,so to increase demand parliament should use an expansionary policy.

The goverment should increase goverment spending and /or decrease taxes.

B)i) Real GDP will be equal to potential GDP (1.58), higher than actual GDP(1.52)

ii) potential GDP will be same and Equal to 1.58

iv) Unemployment will be lower than if government take no action as Increasing output requires more labour so unemployment will decrease.

C)i)

LRASzoly IRAJZaS frice 1.52 1.57 20

ii)

AD 2014 RAS2015 SRAS 2014 1:52 157

iii)

AD 2014 RAS2015 SRAS 2014 1:52 157

iv)

ERASZO14 19 LRASZOIS -SRAS 2015 -SRASZOly AD2o! 'ADZOISH AD2015P 1.52 1.58 Gutput