# Recessionary gap and an inflationary gap.

Learning Objectives: ¢ Understand how consumption, investment and government spending determine GDP. ¢ Understand the difference between a recessionary gap and an inflationary gap. ¢ Develop the intuition behind the multiplier. ¢ Examine how fiscal po licy can be used to fix the economy and how the federal budget will be affected. 1) Use the following data to answer the questions below. í¶ = 1500 + . 9 ( í‘ ˆ’ í‘‡ ¿½ ) íº = 500 í¼ í‘ƒ = 2 , 750 í‘‡ ¿½ = 500 í‘ í‘“ = 50 , 000 a) Using the data from above, explain the current state of the federal budget? b) Calculate the MPC and the MPS. Interpret both numbers. c) Find the economy’s current equilibrium , that is í‘ ˆ— and both current consumption í¶ ˆ— and current savings í‘† ˆ— . d) Graph both the current equilibrium ( í‘ ˆ— ) and the full employment equilibrium ( í‘ í‘“ ) for the above economy. e) Based the current equilibrium, where is the economy operating at on the produ ction possibilities frontier, the business cycle and the Philips curve ? f) Based on the data ( í‘ ˆ— í‘Ží‘Ží‘Ž í‘ í‘“ ) is the economy currently experiencing a recessionary gap or inflationary gap? How does the current unemployment rate compare to the natural rate of unemployment? Explain. g) What is the size of the government expenditure m ultiplier ? How does it relate to the round by round effect? h) Assume fiscal policy is used to get the economy back to full employment. By how much and in what direction should government spending be changed to get the economy back to full employment? i) Update all of the previous graphs to reflect the change in government spending. j) Ho w will the change in government spending affect consumption and savings ? Calculate the new level s of consumption and savings . k) How will the change in government spending affect the budget and the national debt? If the government has to borrow money to fix the economy, explain the process. Do you want your assignment written by the best essay experts? Order now, for an amazing discount.