The hypothetical information in the following table shows what the situation will be in 2017 if Congress and the President do not use fiscal policy:
| Year |
Potential GDP |
Real GDP |
Price Level |
| 2016 |
$17.8trillion |
$17.8 trillion |
113.7 |
| 2017 |
$18.2 trillion |
$17.8 trillion |
115.9 |
a. If Congress and the president want to keep real GDP at its potential level in 2017, 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.
b. If Congress and the president are successful in keeping real GDP at its potential level in 2017, 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
c. Draw an aggregate demand and aggregate supply graph to illustrate your answer. Be sure that your graph contains LRAS curves for 2016 and 2017; SRAS curves for 2016 and 2017; AD curves for 2016 and 2017, with and without fiscal policy action; and equilibrium real GDP and the price level in 2017, with and without fiscal policy.