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. Suppose the government wishes to use fiscal policy to reach the full employment level of output. That is, should reach the LRAS level of output. Use the Keynesian spending multiplier that you obtained in (b) to calculate the change in government spending to shift AD by the amount of the output gap.
j. After you compute the change in government spending, use this new level of spending to recalculate the equilibrium level of real GDP (Y) and see if you have reached long run equilibrium. (Hint: the simple multiplier calculation will result in too small a change in government spending.) Explain why you actually need a larger change in government spending than you calculated in (h), in order to reach the long run equilibrium. (Hint: It has something to do with rising inflation and central bank monetary policy.)
Suppose you are given the following information about an economy :Short run Aggregate Supply :SRAS = Y500 0 1 + 14 400Long run Aggregate SupplyCRAS = * * = 25.000Aggregate DemandADCHIG + NXInvestment Spending :1 = 4000 – 250Consumption Spending1000 + 0.75(X – T )Government Spending2000Net Exports ( ex – IM ) :NX 500Taxes – Transfers2400Monetary Policyr = 2 TOMoney Demand :MD20 000 – 2000Money Market equilibrium :MSMDFisher equation+ TOwhere i is the nominal interest rate ( i . e . when the interest rate is T / , it means
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