Econ 201
EC 3
25
1. Use the graph below to answer the following: (9)
a.
b.
c.
d.
e.
f.
g.
h.
i.
What is the short run equilibrium real GDP?
What is short run equilibrium price level?
What kind of gap is this?
How large is the output gap?
If the MPS is 0.25, find the spending multiplier.
Find the change in spending necessary to return the economy to full employment.
What is the ending short run equilibrium real GDP?
What is the ending short run equilibrium price level?
Draw the appropriate shift if the government uses fiscal policy to return the economy to
full employment.
2. If people are spending more than real GDP, (6)
a. What will happen to business inventories? Explain.
b. What will happen to real GDP? Explain.
c. What will happen to unemployment? Explain.
3. Complete the table below. Answer the questions based on the table. Use the data to graph to
the TE-TP line. (Don’t forget the 45 degree line.) Mark the equilibrium. (7)
Real GDP
200
210
220
230
240
Consumption
125
130
135
140
145
Investment
50
50
50
50
50
Government Purchases
40
40
40
40
40
(a) Which columns are autonomous?
(b) What is the multiplier in this economy?
(c) What is the equilibrium real GDP?
Total Expenditure
4. Answer the following questions based on the graph below: (3)
a. According to Keynesian theory, should the government enact an expansionary or
contractionary fiscal policy? How can you tell?
b. Draw how this policy would look on the TE graph above.