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Compute the impact of the decline in consumption

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Reference no: EM132506959

Suppose an economy is initially at long run equilibrium. Using LRAS, SRAS and AD graphs, show this initial point and label it as A.

a. Due to terrorist attacks, the consumption expenditure decreased by $100 billion. With an MPC of 0.8, illustrate this decline in consumption on the graph in (a) and also compute the impact of the decline in consumption on output level (Y). 

b. If the government wants to use taxes to restore long run equilibrium, should taxes increase or decrease and by how much? Please show all computations.

Reference no: EM132506959

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