3. (LO 1, 2) The economy of Morin is shown in Figure 7.10.

a) If potential GDP (LAS) is $540, and the economy is presently in equilibrium, is there an inflationary or a recessionary gap? How much of a gap?

b) By how much must aggregate demand increase in order to close this gap?

c) If every $1 change in government spending leads to a $4 change in aggregate demand, what is the amount by which government spending must increase?

d) Suppose that initially government has a balanced budget. If government increases its spending as in

(c) and tax revenues are 0.25 of real GDP, what will be government’s real budget surplus/deficit at the new full-employment equilibrium? (Deficit/surplus)

of