Consider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is and the spending multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $300 billion. The decrease in government purchases will lead to a decrease in income, generating an initial change in consumption equal to . This decreases income yet again, causing a second change in consumption equal to . The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AL), ) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate demand curve (AD)2) is parallel to the initial aggregate demand curve (A Dj). You can see the slope of AD, by selecting it on the graph. (? ) 140 AD A 135 AD 2 130 125 PRICE LEVEL (CPD) 120 115 110 105 100 2 3 5 6 7 REAL GDP (Trillions of dollars)The following graph shows aggregate demand (AD) and aggregate supply (AS) curves for a hypothetical economy. (? ) 140 A 135 AS 130 AD 2 125 120 New Macro Eq PRICE LEVEL (CPD) 115 110 105 100 AD. 80 200 220 240 280 280 300 320 340 380 380 400 REAL GDP (Billions of dollars) Suppose the full employment output level in this economy is $300 billion. In order to move the economy to full-employment output at the lowest possible price level, the aggregate demand curve must shift to the by at each price level. Use the green line (triangle symbols) to show the shift in aggregate demand necessary to return the economy to full employment. Then use the purple drop lines (diamond symbol) to show the macroeconomic equilibrium at full-employment output. Be sure the new aggregate demand curve (AD2) is parallel to AD1. You can click on A Dj to see its slope. Suppose the government in this economy wants to enact fiscal policies that will shift the aggregate demand curve in the direction and magnitude you indicated. The marginal propensity to consume (MPC) in this economy is 0.8. This implies a spending multiplier of and a tax multiplier ofConsider each fiscal policy listed here. Which policies would shift the aggregate demand curve in a way that restores fullemployment output at the lowest possible price level? Check all that apply. Increase government expenditures by $18 billion Increase taxes by $20 billion Decrease taxes by $25 billion and decrease government expenditures by $8 billion Increase government expenditures by $24 billion and raise taxes by $10 billion Increase government expenditures by $80 billion and raise taxes by $80 billion Consider the hypothetical economy depicted on the graph. Initially, the economy operates below full-employment output at a price level of 105 and real GDP of $480 billion. Then aggregate demand (AD) increases from ADj to AD2, moving the economy up along the intermediate and classical ranges of the aggregate supply (AS) curve. Real GDP increases to the full-employment output level of $540 billion, and the price level increases to 120. 130 AS 125 120 115 AD, 110 105 PRICE LEVEL (CPI) 100 85 AD 80 400 420 440 480 480 500 520 540 560 580 600 REAL GDP (Billions of dollars)The increase in aggregate demand from AD, to AD, 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 AD, to A Dy. 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 5axel byNote: Throughout this problem you can assume, for simplicity, that government transfers are zero. Real GDP Government Spending (G) Tax Revenues (T) (Billions of dollars) (Billions of dollars) ( Billions of dollars) 460 72 70 500 72 72 540 72 74 Use the blue line (circle symbols) to plot the government spending schedule presented in the table. Then use the orange line (square symbols) to plot the economy's tax revenues schedule. (?) o- 78 G 78 T GOVERNMENT SPENDING AND TAXES (Billions of dollars) 70 Deficits 68 84 Surpluses 0 440 460 480 500 520 540 560 580 800 REAL GDP (Billions of dollars)Consider the government spending and tax revenues schedules you plotted. When real GDP is $420 billion, the government runs a budget of Use the purple triangle (diamond symbols) to shade the region between the tax revenues schedule and the government spending schedule in which the levels of real GDP are associated with government budget deficits. Then use the green triangle (triangle symbols ) to shade the region between the two schedules in which the levels of real GDP are associated with budget surpluses