Assume that following relationships hold in the Ghanaian economy: C = 100 + 0.7(Y− T) I = 150 G = ? T = 200 Ye = 3500 a) How much should government spend to attain an equilibrium income level of 3500? b) Suppose that the full employment level of output for this economy is 4000. c) What sort of output gap is Ghana facing? d) Provide a fiscal policy recommendation that could close the gap.
Problem:
Assume that following relationships hold in the Ghanaian economy:
C = 100 + 0.7(Y− T)
I = 150
G = ?
T = 200
Ye = 3500
a) How much should government spend to attain an equilibrium income level of 3500?
b) Suppose that the full employment level of output for this economy is 4000. c) What sort of output gap is Ghana facing?
d) Provide a fiscal policy recommendation that could close the gap.
e) Suppose government spending is still 940 and it wants to reach full employment level, then by how and in what direction should its spending change to close the gap?
f) Suppose government wants to use taxes, then what should be the change in taxes to close the gap?
g) Suppose government spending and taxes increases by 100, what would be the change in equilibrium income?
h) Following from (g) what is the new equilibrium income if the old one was still 3500 for this economy?
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