Name __________________________

Module 21 Featured Worksheet 2

Fiscal Policy and the Multiplier

Use your knowledge of multipliers and fiscal policy to answer each of the following questions.

1. Real GDP is currently $600 billion above potential GDP and inflation is beginning to
dominate the headlines. Draw a correctly labeled AD/AS graph illustrate this economic
instability. How could the government adjust taxes or transfers to return the economy to full
employment? Assume the MPC = 0.75. How large would this lump-sum adjustment need to
be? Show the impact of the policy on output and the price level

2. Current real GDP is $6 trillion and potential GDP is $7.5 trillion. Draw a correctly labeled
AD/AS graph to show this problem in the economy. The government is prepared to pass a
spending package to return the economy to full employment. What kind of spending
package should be passed and how big does it need to be? Assume that the MPC = 0.90.
Show the impact of the policy on output and the price level.

Continued on the following page.

Ray/Anderson, Krugman’s Economics for the AP® Course, 3e ©2019 BFW Publishers, Inc.
3. Determine if the following are discretionary or non-discretionary. Determine if the action is
expansionary or contractionary in each case.

Discretionary or Expansionary
Government Action Automatic or
Stabilizer? Contractionary?
A recession raises the amount of unemployment
compensation paid
Cuts in personal income tax rates
Because incomes rise, people pay a higher
fraction of their incomes in taxes
Raises Social Security taxes paid by workers

Ray/Anderson, Krugman’s Economics for the AP® Course, 3e ©2019 BFW Publishers, Inc.