4. Using fiscal policy to fight inflationConsider the hypothetical economy depicted on the graph. Initially, the economy operates below full-employment output at a price level of 105 andreal GDP of $480 billion. Then aggregate demand (AD) increases from AD₁ to AD2₂, moving the economy up along the intermediate and classicalranges of the aggregate supply (AS) curve. Real GDP increases to the full-employment output level of $540 billion, and the price level increases to120.PRICE LEVEL (CPI)130125120 ▬ ▬ ▬11511010510095908580400 420440AS460 480 500 520 540REAL GDP (Billions of dollars)AD₂AD560 580 600?) PRICE LEIT.400 420 440 460 480 500 520 540 560 580 600REAL GDP (Billions of dollars)10095908580The increase in aggregate demand from AD₁ to AD2 causesAD1inflation.Suppose the marginal propensity to consume (MPC) is 0.90. The government wants to avoid the double-digit inflation associated with the shift fromAD₁ to AD₂. The lowest possible price level associated with full-employment output is 110. To achieve a price level of 110 and full-employmentoutput, the government must enact a fiscal policy that reduces aggregate demand by $40 billion at each price level.To reduce aggregate demand by $40 billion, the government cangovernment expenditures byIf the government wants to use a change in tax policy instead to reduce aggregate demand by $40 billion, it shouldtaxes by

The phrase "demand-pull inflation" refers to economic inflation that is driven by consumer demand,…

The increase in aggregate demand from AD₁ to AD2 causes inflation. Suppose the marginal propensity to consume (MPC) is 0.90. The government wants to avoid the double-digit inflation associated with the shift from AD₁ to AD2. The lowest possible price level associated with full-employment output is 110. To achieve a price level of 110 and full-employment output, the government must enact a fiscal policy that reduces aggregate demand by $40 billion at each price level. To reduce aggregate demand by $40 billion, the government can government expenditures by If the government wants to use a change in tax policy instead to reduce aggregate demand by $40 billion, it should taxes by

The increase in aggregate demand from AD₁ to AD2 causes inflation. Suppose the marginal propensity to consume (MPC) is 0.90. The government wants to avoid the double-digit inflation associated with the shift from AD₁ to AD2. The lowest possible price level associated with full-employment output is 110. To achieve a price level of 110 and full-employment output, the government must enact a fiscal policy that reduces aggregate demand by $40 billion at each price level. To reduce aggregate demand by $40 billion, the government can government expenditures by If the government wants to use a change in tax policy instead to reduce aggregate demand by $40 billion, it should taxes by

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter6: Measuring The Cost Of Living

Section: Chapter Questions

Problem 9PA

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