Part 3 - Bringing It All Together-For each of the following, assume aggregate output = $500 billion, potential output = $750 billion, and the marginal propensity to consume (MPC) is0.8

1. Draw a correctly labeled AS/AD model reflecting the current state of the economy. Label the price level,PL1.
2. What is the least amount of government spending that could achieve full employment? Show your work.
3. Show the result of the government spending on the graph. Label the new price level,PL2.
4. Assume instead that the government takes no action in response to this output gap and allows the economy to self-adjust. Would the result be a price level atPL? Why or why not?
5. What are the benefits of allowing the economy to self-adjust?
6. What are the costs of allowing the economy to self-adjust?
7. What are the benefits of implementing fiscal policy to stabilize the economy?
8. What are the costs of implementing fiscal policy to stabilize the economy?