Short free-response question
Sizing a spending increase
- Unit 3
- 5 points
- About 12 minutes
You can use a calculator on this question, just like on exam day.
A shorter question on one or two models, often with data in a table. You might calculate something like an unemployment rate, real GDP or the spending change needed to close a gap, draw a labeled graph (described in words on this site), and explain an effect. On the exam: Questions 2 and 3 of 3 in Section II; each is worth a quarter of the section score, with about 12 minutes suggested for each. A four-function calculator is allowed.
The question
The economy of Arden is in short-run equilibrium with real GDP of $2,400 billion. Arden's full-employment real GDP is $2,500 billion, and its marginal propensity to consume (MPC) is 0.9. Assume the simple spending and tax multipliers apply, with no crowding out.
Suggested time: 12 minutes
Your answers are saved in this browser as you type.
Part (a)
1 pointCalculate Arden's spending multiplier. Show your work.
0 / 2,500 characters
Part (b)
1 pointCalculate the minimum change in government purchases needed to close Arden's output gap, and identify whether it is an increase or a decrease. Show your work.
0 / 2,500 characters
Part (c)
1 pointSuppose that instead of increasing its purchases, the government cuts taxes by the dollar amount you found in part (b). Calculate the maximum change in real GDP that results, and state whether this would close the output gap.
0 / 2,500 characters
Part (d)
2 pointsDescribe a correctly labeled graph of aggregate demand, short-run aggregate supply, and long-run aggregate supply for Arden. Show the current equilibrium price level and real GDP, labeled PL1 and Y1, and the full-employment output, labeled YF. Then show the effect of the change in government purchases from part (b), labeling the new price level PL2.
0 / 2,500 characters
Checking scoring…
Scoring it yourself shows you the rubric, examples and a model answer. Try writing your answer first.