The hypothetical information in the following table shows what the situation wil
ID: 1130140 • Letter: T
Question
The hypothetical information in the following table shows what the situation will be in 2017 if Congress and the President do not use fiscal policy: Year 2016 2017 Potential GDP Real GDP $17.8 trillion $17.8 trillion 18.2 trillion $17.8 trillion Price Level 113.7 115.9 a. If Congress and the president want to keep real GDP at its potential level in 2017, should they use an expansionary policy or a contractionary policy? In your o answer, be sure to explain whether Congress and the president should increase or decrease government purchases and taxes e b. f ongresr ant the president are successulin keeping real GDP at it potental level in 2017, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action: so i. Real GDP 0 ii. Potential GDP 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 2016 and 2017; SRAS curves for 2016 and 2017; AD curves for 2016 and 2017, with and without fiscal policy action; and equilibrium real GDP and the price level in 2017, with and without fiscal policy.Explanation / Answer
Answering a) and b)
a) If the congress and the president want to keep real gdp at its potential level then they should use expansionary policy so that price becomes higher and hence the real gdp in turn will remain at 17.8 trillion dollar. For this policy, congress and president should increase government purchases and taxes.
b) If successful in maintaining the real gdp at potential level then,
i) Real GDP would have decreased if they had taken no action
ii) Potential GDP would have increased if they had taken no action.
iii) Inflation Rate would have increased if they had taken no action.
iv) The Unemployment rate would have decreased as it has negative relation to inflation rate if they had taken no action.
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