(LO 2, 3) Figure 7.13 shows the aggregate demand/supply and the government budget line for the economy of Mahdi. The economy is presently at equilibrium. For every $1 change in government spending, aggregate demand changes by $3.

a) What is the present level of GDP and the price level in Mahdi? GDP: Price level:

b) Is there a recessionary or an inflationary gap? How much? Gap: Amount:

c) Does government have a budget deficit or a surplus?

How much? (Deficit/surplus)

Amount:

d) By how much must aggregate demand increase or d ecrease in order to move the economy to fullemployment equilibrium? (Increase/decrease)

Amount:

e) Draw in the new aggregate demand curve, labelled AD2.

f) What change in government spending is necessary in order to move the economy to full-employment equilibrium? (Increase/decrease)

Amount:

g) What effect will this have on the level of GDP and price level? New GDP: New price level:

h) If government makes the change in (f), draw in the new budget line, labelled BL2.

i) What will be the new value of government’s budget at this new GDP? (Deficit/surplus)

Amount:

Returning to the original equilibrium, suppose that government is committed to a balanced budget.

j) What change in government spending is necessary in order to balance the budget at the present income level? (Increase/decrease)

Amount:

k) Draw in the new budget line labelled BL3.

l) What effect will the change in (k) have on aggregate demand? (Increase/decrease)
Amount:
m) Draw in the new curve, labelled AD3.
n) As a result of this change in aggregate demand, what will happen to the value of GDP and price level? New GDP: New price level:
o) What will be the new value of government’s budget at this new GDP? (Deficit/surplus)
Amount: