ECON 2301 – How much does aggregate demand need to change to restore the economy

Subject: Economics    / General Economics
Question
The graph below depicts an economy where an increase in aggregate demand has caused inflation.
Assume the government decides to decrease government purchases as fiscal policy to restore full employment GDP. Instructions: Include a negative sign (-) if necessary.
a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium?
$ billion

b. Assuming the MPC in this nation is 0.75, how much does government purchases need to change to shift
aggregate demand by the amount you found in part a?
$ billion

c. Now suppose the MPC is 0.6. To restore the economy to its long-run equilibrium, aggregate demand must be
changed by $
billion and government purchases must be changed by $
billion.