fiscal monetary polices

Fiscal/Monetary Policies (12 marks) The table below shows the hypothetical values for real GDP and the price level in 2019 for a closed economy if the government does not implement fiscal policy. Year Potential GDP Real GDP Price level 2018 1800 billion 1800 billion 105 2019 1900 billion 1960 billion 135 a) Should the government implement an expansionary or contractionary fiscal policy if it wants to keep real GDP at its 2019 level? Give an example of such a policy that the government can implement. (3 marks) b) Suppose that the government is successful in in keeping its real GDP at its potential GDP in 2019. State whether each of the following macroeconomic variables will be higher or lower if the government had taken no action. (4 marks) i) Real GDP ii) Potential GDP iii) The inflation rate iv) The unemployment rate c) True or False Only expansionary fiscal policy creates a multiplier effect' (1 mark) d) Suppose the value of the marginal propensity to consume (MPC) in an economy is 0.5. What is the value of the multiplier? How much will aggregate demand increase by if government purchases in this economy increases by 5 million based on the value of the multiplier? (4 marks)