AP_Krugman_Textbook

208 section 4 National Income and Price Determination

Tackle the Test: Free-Response Questions

1. Refer to the graph above.
   a. What type of gap exists in this economy?
   b. What type of fiscal policy is appropriate in this situation?
   c. List the three variables the government can change to
   implement fiscal policy.
   d. How would the government change each of the three
   variables to implement the policy you listed in part b.

Real GDP

Aggregate
price
level

YP YE

LRAS SRAS

AD

E

PE

Answer (8 points)

1 point:Inflationary

1 point:Contractionary

1 point:Taxes

1 point:Government transfers

1 point:Government purchases of goods and services

1 point:Increase taxes

1 point:Decrease Government transfers

1 point:Decrease government purchases of goods and services

2. a. Draw a correctly labeled graph showing an economy
   experiencing a recessionary gap.
   b. What type of fiscal policy is appropriate in this situation?
   c. Give an example of what the government could do to
   implement the type of policy you listed in part b.