Currently the economy is producing real GDP (output) of $1.2 Trillion ($1,200,000,000,000). Economists estimate that the full employment real GDP (output) is actually $1.5 Trillion ($1,500,000,000,000). The marginal propensity to save (mps) is 25%. The government currently has a balanced budget.

1.Draw an AD/AS model showing the current output and the full employment level of output. Use $1.2T and $1.5T as abbreviations for output rather than Y1 and Yf.

2.Is there a recessionary gap or an expansionary gap? What is the size of the gap?

3.Is the current rate of unemployment below the natural rate of unemployment, above the natural rate of unemployment, or equal to the natural rate of unemployment? Why?

4.What is the marginal propensity to consume in this economy?

5.What is the size of the government spending multiplier in this economy?

6.What is the size of the tax multiplier in this economy?

7.If the government increases spending by $100 million without also increasing taxes, how much will GDP increase?