Suppose that the economy of Freedonia obeys the following relationships:
C = 100 + 0.6(Y � T)
IP = 150
G = 250
NX = 120
T = 200
a. Find the numerical equation relating to planned aggregate expenditure (PAE) to output (Y).
b. Calculate short-run equilibrium output, showing all calculations. What is the government budget balance? Does Freedonia�s government have a budget surplus or a budget deficit?
c. What is the effect of an increase in government purchases from G = 250 to G = 300 on GDP (Y)? Solve for the new level of equilibrium output. What is the multiplier? Show your work.
d. Suppose that the government simultaneously increases net taxes by 50 (that is, continue to assume that government purchases have increased by 50, as in part (c)). Calculate the new level of equilibrium output, showing your work. What is the new government budget balance? How has it changed from (b)? Does Freedonia�s government have a budget surplus or a budget deficit?
e. Assume that the equilibrium output found in (b) above is the potential output (Y*) of this economy. After the rise in both government purchases (in (c)) and net taxes (in (d)), what is the output gap in percentage terms? Is this an expansionary gap or a recessionary gap? If the natural rate of unemployment is 6%, use Okun�s law to calculate what the actual unemployment rate must be.
Suppose that the economy of Freedonia obeys the following relationships:
C = 100 + 0.6(Y � T)
IP = 150
G = 250
NX = 120
T = 200
a. Find the numerical equation relating to planned aggregate expenditure (PAE) to output (Y).
b. Calculate short-run equilibrium output, showing all calculations. What is the government budget balance? Does Freedonia�s government have a budget surplus or a budget deficit?
c. What is the effect of an increase in government purchases from G = 250 to G = 300 on GDP (Y)? Solve for the new level of equilibrium output. What is the multiplier? Show your work.
d. Suppose that the government simultaneously increases net taxes by 50 (that is, continue to assume that government purchases have increased by 50, as in part (c)). Calculate the new level of equilibrium output, showing your work. What is the new government budget balance? How has it changed from (b)? Does Freedonia�s government have a budget surplus or a budget deficit?
e. Assume that the equilibrium output found in (b) above is the potential output (Y*) of this economy. After the rise in both government purchases (in (c)) and net taxes (in (d)), what is the output gap in percentage terms? Is this an expansionary gap or a recessionary gap? If the natural rate of unemployment is 6%, use Okun�s law to calculate what the actual unemployment rate must be.
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Related questions
Assume that the equations below describe the expenditures within a particular macroeconomy and that these equations conform to the assumptions we've made in the lecture regarding the fixed price level Aggregate Expenditure model. All values for expenditure and income are dollar amounts, but for simplicity, we've dropped the $ below.
| C = 0.8(DI) + 1000 | C = Consumption expenditure, DI = Disposable Income |
| I = 2000 | I = Investment expenditure |
| G = 1000 | G = government expenditure |
| X = 1600 | X = spending on exports |
| M = 1800 | M = spending on imports |
| DI = Y - T | Y = real GDP, T = tax revenues/> |
| T = 1000 | |
| Yp = 12000 | Yp = Potential GDP |
Given the equations above, we can describe the GDP, government budget, and net exports in this economy. Select three characteristics from the list below which accurately describe this economy. Note that there is no partial credit on this question. I.e., your answer will either be all correct, or all wrong.
| a. |
inflationary gap |
|
| b. |
recessionary gap |
|
| c. |
no output gap |
|
| d. |
government budget surplus |
|
| e. |
government budget deficit |
|
| f. |
balanced government budget |
|
| g. |
trade deficit |
|
| h. |
trade surplus |
|
| i. |
net exports of zero |
