03 Jun Question Question: The economy of Pluto has a horizontal aggregate supply curve in the very short run (i.e. the price level is fixed). You are given the following i
Question
Question:
The economy of Pluto has a horizontal aggregate supply curve in the very short run (i.e. the price level is fixed). You are given the following information .
Assume that the government of Pluto has a balanced budget (i.e. its income T is equal to its
expenses G +TR). However, the economy is having a recessionary gap and the real GDP is 100
billion plutokas (NASA says it is the Pluto’s currency!) less than the potential GDP. The government of Pluto wants to implement an expansionary fiscal policy to increase the real GDP so that it becomes equal to potential GDP by either increase its expenditure or cut the taxes or a combination of these but it does not want to have a budget deficit, or its membership in the solar system would be terminated bythe other planets. It contacts Mars and the Martian economists tell the government of Pluto
to increase both lump sum tax and the government expenditure by 100 billion plutokas.
a) Explain, numerically, why and how this solve s the problem of recessionary gap in Pluto.
b) The Martian economists add that “if you are not in rush, there is no need for implementing any policies in longer run when your SAS curve is upward sloping and LAS is vertical and the economy solves the problem itself!”.
What are the Martian economists suggesting? Explain the adjustment process (by means of AD,SAS, and LAS graphs).
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