Reference no: EM132415228

1. What is the simple equation for calculating the size of the multiplier? If the MPC rises, what happens to the size of the multiplier? Now, in words, why does this mathematical relationship make sense?
2. Assume that the MPC is 0.75, and that planned autonomous investment falls by $500. By how much does Y_e fall? Would the answer be different if the change were in autonomous consumption rather than investment? Why or why not?
3. On a graph, show a level of equilibrium GDP that illustrates the problems that capitalism creates, and speculate on how we can get equilibrium from its lower level to the desired level.
4. Define the concept of fiscal policy.
5. One thing we have learned from history is that just because the economy is in equilibrium does not mean we are at a level of GDP high enough to create full employment. Let's call the desired level of GDP "full-employment Y", denoted Y_N.  Assume that Y_e<Y_N. The difference between Y_e and Y_N is called a recessionary gap. Show this gap on a graph. Now, what would have to happen through fiscal policy for the economy to achieve Y_N? Describe what is happening and draw the graph.
6. Draw an inflationary gap and explain what fiscal policy would be one possible remedy for closing the gap.