Fiscal/Monetary Policies (12 marks)

The table below shows the hypothetical values for real GDP and the price level for the years 2021 2022 for a closed economy.

Year	Potential GDP	Real GDP	Price level
2021	3600 billion	3600 billion	110
2022	3800 billion	3920 billion	125

a) Is this economy suffering from inflationary or deflationary pressure in the year of 2022? Explain. (3 marks)

b) Should the government implement an expansionary or contractionary fiscal/monetary policy in 2022 if it wants to keep real GDP in 2022 at its potential GDP level? Give an example of a fiscal and monetary policy instrument that can be implemented. (3 marks)

c) What will happen to the unemployment and potential GDP in 2022 as the economy adjusts back to the long-run equilibrium as a result of the policy implemented in part (b) above. (2 marks)

d) Suppose the value of the marginal propensity to consume (MPC) in an economy is 0.6. What is the value of the multiplier? How much will aggregate demand increase by if government purchases in this economy increases by 10 million based on the value of the multiplier? (4 marks)