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In each of the following cases, either a recessionary orinflationary gap exists. Assume that the aggregate supply curveis horizontal so that the change in real GDP arising from a shiftof the aggregate demand curve equals the size of the shift of the curve. Calculate both the change in government purchases ofgoods and services and the change in government transfers necessary to close the gap.
a. Real GDP equals $100 billion, potential outputequals $160 billion, and the marginal propensity to consume is0.75.
b. Real GDP equals $250 billion, potentialoutput equals $200 billion, and the marginal propensity to consumeis 0.5.
c. Real GDP equals $180 billion, potentialoutput equals $100 billion, and the marginal propensity to consumeis 0.8.
Illustrate what is the
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Consider an air basin with only two consumer, Huck and Matilda. Suppose Huck's demand for air quality is given by q_h=1-p where p is Huck's marginal willingness to pay for air quality. Similarly, Matilda's demand is given by q_m=2-2p. Air quality ..
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