Use the below graph to answer the following questions. Price Level LAS SAS AD AD Output(Trilions) 12 15.5
A. What is the value of potential GDP?
B. Does the above situation illustrate an Inflationary Gap or a Recessionary Gap? How do you know and explain the problems associated with such a gap?
C. If the government chooses to fix the economy, will it choose an expansionary or contractionary policy? What is the goal of this policy?
D. Assuming the government knows that the MPC = 0.75. If they choose to change government expenditures, should this change be an increase or decrease? How much should the change be? Show your work.
E. If the MPC were to increase, would the change in government expenditures that you solved for in part d, become larger or smaller? Explain why.
F. Show on the graph, how the AD curve returns to equilibrium. G. If instead of increasing expenditures, the government chooses to decrease taxes, how much should taxes be reduced? How much of the tax reduction is saved by the consumers