Assume that the aggregate demand in Italy can be described by: AD = CY + I + G

there CY = 600+0,75Yd (Yd is consumers' disposable income)

Yd = Y - T

T = 550

I = 250 G = 320

Assume that Italiy's potential GDP is 3200.

a) Calculate output in short-run equilibrium and illustrate the result in a graph.

b) How big is the GDP gap and in what economic situation is Italy in? Motivate your answer.

c) Calculate, and explain what is meant by, the multiplier.

d) Assume that Italy wants to change GDP to its potential level. How much does the country have to change tax (T) or government spending (G) to achieve this? Calculate this for both instruments (T and G).

e) Which of the interventions in task (d) is preferable? Motivate your answer.