Consider the following initial conditions (where all dollar amounts are in billions): C = 600 + 0.6y D , I = 400, G 1 = 300, T 1 = 200 A. Given these initial conditions, calculate y*. Draw a rectangle around the expenditure equation resulting from step I and your calculated y* in step II. Draw a graph showing the total expenditure (E) curve and y*. Label y*, E*, and the E-intercept of the expenditure equation. If yF were $3,100, would the economy be in a recessionary gap or an inflationary gap? What is the size of the gap? Label yF and show the gap on the graph from B. If the government were to try to close the gap by changing the level of government spending, how much of a change (∆G) would be necessary to close the gap? What would be the new level of government spending (G2 )? What is the new expenditure equation (draw a rectangle around it)? On the graph from part B, draw the new expenditure curve, E2 , and label the new y* and the new E intercept. Alternatively, if the government were to close the original gap by changing the tax, how much of a change (∆T) would be necessary to close the gap? What would be the new level of the tax (T2 ) and the new expenditure equation (draw a rectangle around it)? (No need to adjust the graph)

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Answered: Consider the following initial…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider the following initial conditions (where all dollar amounts are in billions): C = 600 + 0.6y D , I = 400, G 1 = 300, T 1 = 200 A.

Given these initial conditions, calculate y*. Draw a rectangle around the expenditure equation resulting from step I and your calculated y* in step II.
Draw a graph showing the total expenditure (E) curve and y*. Label y*, E*, and the E-intercept of the expenditure equation.
If yF were $3,100, would the economy be in a recessionary gap or an inflationary gap? What is the size of the gap? Label yF and show the gap on the graph from B.
If the government were to try to close the gap by changing the level of government spending, how much of a change (∆G) would be necessary to close the gap? What would be the new level of government spending (G2 )? What is the new expenditure equation (draw a rectangle around it)? On the graph from part B, draw the new expenditure curve, E2 , and label the new y* and the new E intercept.
Alternatively, if the government were to close the original gap by changing the tax, how much of a change (∆T) would be necessary to close the gap? What would be the new level of the tax (T2 ) and the new expenditure equation (draw a rectangle around it)? (No need to adjust the graph)

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