If instead, government chose to use the income tax to close the output gap rather than changes in spending, calculate the change in tax revenue the government would need to close the gap. Assume the same figures as part (d. 1. What is one possible automatic stabilizer in the economy that would contribute to closing this output gap? g. Assume that instead of intervening, the government allowed the economy to self-adjust in the long run. On your graph from part), llustrate how the economy would self- adjust in the long run hat the GDP deflator is 110 in the year that the output gap is identified, and three years later it is 105, does this means the recessionary gap is biely gone or as it? Explain Answer 1 of 1 Done a. Prices LRAS SRAS PRICES PL AD GDP -OUTPUT LEVEL The level of output would be less than the full- employment output level Yf because of cyclical unemployment. Thus, the short-run equilibrium with the crossing of AD and the SRAS curve will be to the left side of the full-employment output level. The graph is presented in the explanation section. b. Spain's current output Y1 with high unemployment will be inside the production possibility curve. c. The inflation rate will be low as the rate of unemployment is high as per the Phillips curve. d. If MPC=0.9 Multiplier = 1/1-MPC = 1/1-0.9 = 10 If the output gap is $100 billion, then there will be a rise in government disbursements to cover this gap. Change in government spending = output gap/multiplier 100/10 = 105 billion Therefore, government spending will increase by 105 billion to cover the output gap of 100$ billion. **As per Chegg Guidelines, I am liable to answer the first four sub-parts of the question. Do post the rest separately.
