Problem
1. Fiscal Policy with an Expansionary Gap Using the aggregate demand-aggregate supply model, illustrate n economy with an expansionary gap. If the government is to close the gap by changing government purchases, should it increase or decrease those purchases? In the long run, what happens to the level of real GDP as a result of government intervention? What happens to the price level? Illustrate this on an AD-AS diagram, assuming that the government changes its purchases by exactly the amount necessary to close the gap.
2. Fiscal Policy This chapter shows that increased government purchases, with taxes held constant, can eliminate a recessionary gap. How could a tax cut achieve the same result? Would the tax cut have to be larger than the increase in government purchases? Why or why not?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.