The hypothetical information in the following table shows what the situation will be in 2019 if Congress and the president do not use fiscal policy:

a. If Congress and the president want to keep real GDP at its potential level in 2019, should they use an expansionary policy or a contractionary policy? In your answer, be sure to explain whether Congress and the president should increase or decrease government purchases and taxes.
b. If Congress and the president are successful in keeping real GDP at its potential level in 2019, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action:
i. Real GDP
ii. Potential GDP
iii. The inflation rate
iv. The unemployment rate
c. Draw an aggregate demand and aggregate supply graph to illustrate your answer. Be sure that your graph contains LRAS curves for 2018 and 2019; SRAS curves for 2018 and 2019; AD curves for 2018 and 2019, with and without fiscal policy action; and equilibrium real GDP and the price level in 2019, with and without fiscal policy.

Transcribed Image Text:

Potential GDP Real GDP $17.9 trillion Price Level 113.7 Year 2018 $17.9 trillion $17.9 trillion 2019 $18.3 trillion 115.9