1. Draw a real expenditures curve on a graph showing a recessionary gap. Explain
ID: 1237510 • Letter: 1
Question
1. Draw a real expenditures curve on a graph showing a recessionary gap. Explainwhat happens to real GDP when it is initially to the right of the equilibrium point
and why? Indicate two public policies that would be appropriate for addressing
this situation. Explain their impact on your graph.
2. Draw a real expenditures curve on a graph showing an inflationary gap. Explain what happens to real GDP when it is initially to the left of the equilibrium point and why? Indicate two public policies that would be appropriate for addressing this situation. Explain their impact on your graph.
I understand you can not show a graph but any help with the rest is greatly appreciated.
Explanation / Answer
The only ones i can answer are 1,7, and 8 without a graph. 1. Real expenditures curve in equilibrium is 45 degrees because aggregate expenditures equals GDP along a 45 degree curve. If I had a graph I would show it better but basically when spending=production you are in equilibrium. 7. Fiscal policy is rarely able to deliver on its promise. Fiscal policy is especially difficult to use for stabilization because of the “inside lag”—the gap between the time when the need for fiscal policy arises and when the president and Congress implement it. If economists forecast well, then the lag would not matter because they could tell Congress the appropriate fiscal policy in advance. But economists do not forecast well. Absent accurate forecasts, attempts to use discretionary fiscal policy to counteract business cycle fluctuations are as likely to do harm as good. The case for using discretionary fiscal policy to stabilize business cycles is further weakened by the fact that another tool, monetary policy, is far more agile than fiscal policy. 8. Supply side tax cuts mean that business's pay less taxes. In turn they can produce more products at lower prices so more people buy them. This is supposed to jump start the economy.
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