This Question: 1 pt 4 of 15 (3 complete) This Quiz: 15 pts possible The hypothet

Question

This Question: 1 pt 4 of 15 (3 complete) This Quiz: 15 pts possible The hypothetical information in the following table shows what the situation will be in 2019 if the federal government does not use fiscal policy: Year Potential GDP Real GDP 2018 2019 $17.9 trillion $18.3 trillion $17.9 trillion $17.9 trillion115.9 Price Level 113.7 If Congress and the president want to keep real GDP at its potential level in 2019, they should use an expansionary fiscal policy which would mean increasing government spending or cutting taxes 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: Real GDP will be higher Potential real GDP will be the same The inflation rate will be higher The unemployment rate will be lower

Explanation / Answer

In 2019, potential real GDP is $18.3 trillion while real GDP is $17.9 trillion.

Since, real GDP is less than the potential real GDP, expansionary policy formulation is required to increase the real GDP and bring it to the level of the potential real GDP.

Government can undertake expansionary fiscal policy in this regard.

So,

If Congress and the president want to keep real GDP at its potential level in 2019, they should use an expansionary fiscal policy, which would mean increasing government spending or cutting taxes.

If policy become sucessful then real GDP will increase from $17.9 trillion to $18.3 trillion. There would be no change in potential GDPas expansionary fiscal policy will impact only real GDP.

Expansionary fiscal policy increases the real GDP by increasing the aggregate demand.

Given the aggregate supply, increase in aggregate demand brings an increase in price level which in turn leads to increase in inflation rate.

Increase in real GDP will imply an increase in production which will create more jobs leading to fall in unemployment rate.

So,

Real GDP will be higher.

Potential real GDP will be the same.

The inflation rate will be higher.

The unemployment rate will be lower.

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