QUESTION 4 Consider an economy with the following characteristics (all variables measured in billions of dollars). C = 80 +0.4Yd t = 0.25 I= 15 G = 20 X=5 M = 0.1Y where yd is disposable income and t is the income tax rate. (a) Calculate the equilibrium GDP. (b) At the equilibrium GDP, calculate the fiscal balance. (c) If the full employment GDP is $80 billion, is the economy experiencing a recessionary or inflationary gap? Explain your answer. (d) If the government wants to close the gap, should government increase or decrease expenditure? By how much?
QUESTION 4 Consider an economy with the following characteristics (all variables measured in billions of dollars). C = 80 +0.4Yd t = 0.25 I= 15 G = 20 X=5 M = 0.1Y where yd is disposable income and t is the income tax rate. (a) Calculate the equilibrium GDP. (b) At the equilibrium GDP, calculate the fiscal balance. (c) If the full employment GDP is $80 billion, is the economy experiencing a recessionary or inflationary gap? Explain your answer. (d) If the government wants to close the gap, should government increase or decrease expenditure? By how much?
Chapter11: Managing Aggregate Demand: Fiscal Policy
Section: Chapter Questions
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![QUESTION 4
Consider an economy with the following characteristics (all variables measured in billions of
dollars).
C = 80+ 0.4Yd
t = 0.25
I= 15
G = 20
X = 5
M = 0.1Y
where yd is disposable income and t is the income tax rate.
(a)
Calculate the equilibrium GDP.
(b)
At the equilibrium GDP, calculate the fiscal balance.
(c)
If the full employment GDP is $80 billion, is the economy experiencing a recessionary
or inflationary gap? Explain your answer.
(d)
If the government wants to close the gap, should government increase or decrease
expenditure? By how much?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb0f18c60-2b14-4c75-a028-a9713e3a91b4%2F818cefa8-e9c9-44b4-ad88-372c7529b14e%2F7ogo0vk_processed.png&w=3840&q=75)
Transcribed Image Text:QUESTION 4
Consider an economy with the following characteristics (all variables measured in billions of
dollars).
C = 80+ 0.4Yd
t = 0.25
I= 15
G = 20
X = 5
M = 0.1Y
where yd is disposable income and t is the income tax rate.
(a)
Calculate the equilibrium GDP.
(b)
At the equilibrium GDP, calculate the fiscal balance.
(c)
If the full employment GDP is $80 billion, is the economy experiencing a recessionary
or inflationary gap? Explain your answer.
(d)
If the government wants to close the gap, should government increase or decrease
expenditure? By how much?
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