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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 much will real GDP change after the increase in government spending (assume no multiplier effects)?

User Gines
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Given that the government increases spending to stimulate the economy. We need to determine how much real GDP will change after the increase in government spending, provided no multiplier effects.What is Expansionary fiscal policy?Fiscal policy refers to the use of government spending, tax policies, and transfer payments to stimulate economic growth or control inflation.Expansionary fiscal policy is a type of fiscal policy that is used to increase aggregate demand (AD) in the economy. This policy includes an increase in government spending and a decrease in taxes, resulting in an increase in disposable income, which will ultimately increase consumer spending.How much will real GDP change after the increase in government spending (assuming no multiplier effects)?If there are no multiplier effects, the GDP equation will be as follows:Y = C + I + GIn which Y = Real Gross Domestic Product, C = Consumption, I = Investment, and G = Government spending.If there is no multiplier effect, the equilibrium level of GDP (Y) is equal to the initial level of aggregate demand (AD1).When the government increases spending to stimulate the economy, the aggregate demand curve shifts to the right from AD1 to AD2. As a result, Real GDP increases from Y1 to Y2. Therefore, we can see that the real GDP will change by the same amount that government spending is increased. Thus, the change in real GDP is equal to the increase in government spending.Therefore, if there are no multiplier effects, real GDP will increase by the amount of the increase in government spending.

User Malfet
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