Macro Unit 3 3.6- Fiscal Policy and the Multiplier Part 1 - Check Your Understanding- The graph below shows the percent change in Real GDP for the US between 2005-2013. Use the graph to answer the following questions. FRED. - Real Gross Domestic Product 5.0 2. 0.0 Percent Change from Preceding Period -2. -7. -10.0 2006 2007 2008 2009 2010 2011 2012 1. Draw aggregate demand (AD), aggregate 2. Draw the short run Phillips curve (SRPC) supply (AS), and long-run aggregate (LRAS) and long-run Phillips curve (LRPC) for for the year 2009. Label price level PL,, the the year 2009. Label a point on your output Y,, and the full-employment output graph "A" that represents the state of the YF. economy in 2009. 3. In response to these economic conditions, Congress and President Obama passed the American Recovery and Reinvestment Act (ARRA) into law in February 2009. Show the intended result of the ARRA on both the AD/AS model and the Phillips curve model. On the AD/AS model, label the new price level PL2 and the output, Y2 . On the Phillips curve, label the state of the economy point "B". Video Help- https://goo.gl/PN6htbMacro Unit 3 3.6- Fiscal Policy and the Multiplier Part 3 - Practice- In 2009, the ARRA cut taxes by approximately $300 billion, increased government spending by approximately $300 billion, and increased transfer payments by approximately $200 billion. Answer the following questions assuming that the marginal propensity to consume was 0.75. 4. What was the maximum change in GDP from $300 billion of government spending? 5. What was the maximum change in GDP from a $300 billion tax cut? 6. What was the maximum change in GDP from $200 billion of government transfers? 7. If these numbers were accurate, what was the maximum change in GDP from the entire stimulus package? 8. Assume that American consumers, fearing an economic collapse, increased their marginal propensity to save to 0.5. Would this increase, decrease, or not change the effectiveness of the stimulus package? Part 3 - Practice- Assume that in the year 2025 the US economy has a recessionary gap that is estimated to be $1 Trillion. Answer the following questions assuming that the marginal propensity to consume is 0.5. 9. Identify the least amount the government could spend to get the economy back to full employment. 10. Identify the dollar amount of a tax cut to bring the economy back to full employment. Part 4 - More Practice- Assume instead that the US economy is operating beyond full employment. 11. Draw aggregate demand (AD), aggregate 12. Draw the short run Phillips curve (SRPC) supply (AS), and long-run aggregate (LRAS) and long-run Phillips curve (LRPC) for this for this scenario. Label price level PL,, the scenario. Label a point on your graph "A" output Y,, and the full-employment output YF. that represents the state of the economy. 13. Show on both graphs the effects of contractionary fiscal policy. On the AD/AS, label the new price level PL2 and the output, Y2 . On the Phillips curve, label the new state of the economy point "B". Video Help- https://goo.gl/PN6htb 2