Assume That the Economy Is in the State Described by the Following

question 67

Essay

Assume that the economy is in the state described by the following table.
$$\begin{array} { | c | c | c | c | } \hline \text { Year } & \text { Potential GDP } & \text { Real GDP } & \text { Price Level } \\\hline 1 & \$ 1020 \text { billion } & \$ 1020 \text { billion } & 100 \\\hline 2 & \$ 1080 \text { billion } & \$ 1060 \text { billion } & 103 \\\hline\end{array}$$ Draw a dynamic aggregate demand and aggregate supply diagram to illustrate the state of the economy in Year 1 and Year 2,assuming that no policy is pursued.Then illustrate the appropriate fiscal policy to use in this situation.Assume that the policy results in the economy producing at potential GDP.Provide an explanation. _____________________________________________________________________________________________
_____________________________________________________________________________________________

---

Definitions:

Accounting Break-even

The point at which a company's total revenues exactly match its total expenses, indicating no net profit or loss from operations.

Financial Break-even

The point at which total revenues and total expenses are equal, resulting in no net profit or loss, indicating the minimum performance level required to avoid losing money.

NPV

NPV (Net Present Value) is a calculation used to determine the present value of an investment's cash inflows and outflows over time, taking into account a specific discount rate.

Variable Costs

Costs that change in proportion to the level of goods or services that a business produces.