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Explain appropiate graphs (Basic) as indicated.

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Solution Summary

How could the government use spending or taxes separately (not together) to counteract the effect on GDP in (a)? Does a given change in government spending (say, $1 billion) have the effect on GDP as the equivalent ($1 billion) change in taxes?

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In Canada in 2000, consumer confidence rose substantially, causing autonomous consumption expenditures to increase more than economists had predicted.
a. Demonstrate graphically with the multiplier model a shift in the AE curve that would have resulted from the increase in autonomous consumption expenditures.
Autonomous expenditures are unrelated to income. Changes in autonomous expenditures shift the AE curve itself. The vertical intercept equals the sum of autonomous expenditures. The AE curve shifts up due to an increase in autonomous consumption. In the graph there's an upward shift of the AE curve.

b. Demonstrate graphically which phase of the business cycle is the economy likely to be ...

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