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.