AP Macroeconomics 3.8: Fiscal Policy

Analyze expansionary and contractionary fiscal policy, calculate multiplier effects, and evaluate government spending, taxes, and transfers.

[Maximum number: 1]

Assume that Nepal is in long-run macroeconomic equilibrium and has an open economy.

Assume that at the short-run equilibrium shown on your graph in part B, Nepal is

experiencing a 400 million rupee output gap. Policymakers in Nepal want to use

discretionary fiscal policy to return the economy to full employment, and the marginal

propensity to consume is 0.75. Calculate the minimum change and state the direction of

change in government spending required to completely close the output gap in the short run.

Show your work.

C Point 4	Calculate the minimum change in government spending as a decrease of 100 million rupees and show your work. $\text { Min Change }=\frac{-400 \text { million rupees }}{\frac{1}{(1-0.75)}}=\frac{-400 \text { million rupees }}{4}=-100 \text { million rupees }$	1 point

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POL-1.A—a. Define fiscal policy and related terms. b. Explain (using graphs as appropriate) the short-run effects of a fiscal policy… question 1