Worksheet 21.2: Fiscal Policy and the Multiplier Use your knowledge of multipliers and fiscal policy to answer each of the following questions. 1. Real GDP is currently $600 billion above potential GDP and price inflation is beginning to dominate the headlines. Draw a correctly labeled AD/AS graph to show the problem in the economy. How could the government adjust taxes or transfers to return the economy to full employment? Assume the MPC=.75. How large would this lump-sum adjustment need to be? Show the impact of the policy on output and price level on the graph you drew previously. 2. Current real GDP is $6 trillion and potential GDP is $7.5 trillion. Draw a correctly labeled AD/AS graph to show the problem in the economy. The government is prepared to pass a spending package to return the economy to full employment. What kind of spending package should be passed and how big does it need to be? Assume that the MPC = .90. Show the impact of the policy on output and price level on the graph you drew previously