Congratulations one more time. You have been appointed chair of Economic Advisers in Fantasyland. Income is currently $600,000, unemployment is 5 percent, and there are signs of coming inflation. You rely on your research assistant for specific numbers. He tells you that potential income is $564,000 and the mpe is .5.
a. The government wants to eliminate the inflationary gap by changing expenditures. What policy do you suggest?
b. By how much will unemployment change after your policy has taken effect?
c. Your research assistant comes in and says, "Sorry, I meant that the mpe is .8." Redo your calculations for parts a and b.