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Macroeconomic

\f2. The Multiplier Effect: a. Explain the Multiplier Effect. b. If the government spends $5 million, will AD increase by the same amount? 0. How much will AD increase? 5. State the two equations for calculating the Spending Multiplier and explain its signicance: Draw an AS/AD curve with a Classical LRAS curve that is $1,000 billion at full employment on the X-axis. Draw a second curve labeled AD; that shifts to the left and is at equilibrium at $500 billion on the X-axis. Assume the MPC is 0.8. Use our lectures in class to answer the following questions a. What type of gap is depicted? b. Is a contractionary or expansionary policy needed? c. What are two options to x the gap? d. What is the least amount of government spending to close the gap Draw an AS/AD curve with a Classical LRAS curve that is $80 billion at full employment on the X-axis. Draw a second curve labeled AD; that shifts to the right and is at equilibrium at $100 billion on the X-axis. Assume the MPC is 0.5. Use our lectures in class to answer the following questions What type of gap is depicted? Is a contractionary or expansionary policy needed? What are two options to x the gap? How much is needed to close the gap? Explain the effect of taxation as a function of expantionary policy. 8. Explain the effect of taxation as a function of expantionary policy. 9. Provide the equation for calculating the tax multiplier. 10. Provide the two reasons why the US. Progressive Income Tax System works counter- cyclically to stabilize the economy. 1 1. Provide two reasons why Unemployment and Welfare benets act counter-cyclically to stabilize the economy