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AD1 is the initial aggregate demand curve and AS is the aggregate supply curve for an economy. Then the government pursues an expansionary fiscal policy action. AD2 shows the initial increase in aggregate demand and AD3 shows the final increase in spending after the fiscal policy action has worked its way through the economy (by means of the multiplier process).
Assume that the government increases spending to stimulate the economy. How large is the initial spending increase?
(ex: if your answer is $20 billion, then enter: 20)
Using figure 1, suppose that, instead of increasing spending, the government decides to stimulate the economy by cutting taxes. To achieve the same effect as a spending increase, how large must the tax cut be?
Using figure 1, what is the value of the marginal propensity to consume (MPC) in this economy?
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