APMacro: Practice FRQ



Suppose that the United States economy is in a deep recession. Using a correctly labeled aggregate demand and aggregate supply graph, show the equilibrium price level and real gross domestic product. There is a debate in Congress as to whether to decrease personal income taxes by a given amount or to increase government purchases by this amount. Explain which of the two fiscal policies will have a larger impact on real gross domestic product. Explain how a decrease in personal income taxes will affect Real gross domestic product and the price level in the short run. Explain the mechanism by which an increase in net investment will change aggregate demand and long-run aggregate supply.



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