The hypothetical information in the following table
shows what the situation will be in 2021 if Congress and
the president do not use fiscal policy:
a. If Congress and the president want to keep real GDP at
its potential level in 2021, should they use an expansionary policy or a contractionary policy? In your
answer, be sure to explain whether Congress and the
president should increase or decrease government
purchases and taxes. Draw an aggregate demand and
aggregate supply graph to illustrate your answer. Be
sure that your graph contains LRAS curves for 2020
and 2021; SRAS curves for 2020 and 2021; AD curves
for 2020 and 2021, with and without fiscal policy
action; and equilibrium real GDP and the price level in
2021, with and without fiscal policy.
b. If Congress and the president are successful in keeping
real GDP at its potential level in 2021, state whether
each of the following will be higher, lower, or the same
as it would have been if they had taken no action.
i. Real GDP
ii. Potential GDP
iii. The inflation rate
iv. The unemployment rate