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?

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 1DQ

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