Thursday, May 10, 2007

Chapter 12 homework : Questions 2 and 3

Multiplier = 1 / (1-0.8)
= 1/ 0.2
= 5

$25 Billion / 5 = necessary government spending

The government must spend $5 Billion to increase the GDP by $25 Billion

To end severe demand pull inflation, contractionary fiscal policy may be in order. To do this, the government would have to decrease public spending, increase taxes, or somehow combine both. This would then cause an inward shift of AD, bringing down the price level.
Someone who would want to preserve the size of the government would increase taxes rather than decrease public spending, and someone who thinks the public sector is too large would do the opposite.

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