Part A - GDP, Multipliers, Output Gaps (6 Marks)

The following hypothetical data shows the demand schedule for business investment (or the amount of business investment that would be generated at various rates of interest).

Interest

Rate (%)

Business

Investment ($Billions)

0.50

360.0

0.75

355.0

1.00

350.0

1.25

340.0

1.50

330.0

1.75

320.0

2.00

310.0

2.25

295.0

2.50

280.0

2.75

265.0

3.00

250.0

Hypothetical assumptions for the economy:

Leakages are 40% of new income.

The current bank rate is 1.50%.

The current Real GDP in 2018 dollars is $2,109,000,000,000 OR$2,109 Billion

It is estimated that the potential output RGDP would be $2,159 Billion.

1.Use the information above to solve the following problem.(3 marks)

1. Identify whether there is a recessionary gap or an inflationary gap and the amount of the output gap.

1. Given that leakages are 40%, what is the amount of the multiplier on any new spending?

1. Using the multiplier, what change in business investment spending would change GDP enough to eliminate the output gap?

1. What new rate of interest would bring about this change in business investment?

2.How much would GDP change if the government decreased taxes by $100 million dollars and leakages are 70%?(1 mark)

3.Draw a label a model for Aggregate Demand and Short-Run Aggregate Supply.Draw Long-Run Aggregate Supply (LRAS) on your chart to show the output gap in this case.Use the chart to show how the change in business investment spending will affect the economy and the impact on inflation and the RGDP.(2 marks)

Part B- Fiscal Policy Recommendation (5 Marks)

Write recommendations for government fiscal policy (specific spending and taxation changes) that you feel would be best for the Canadian economy using your understanding of the economics concepts taught in the course.Use the following guidelines as your recommendations:

Give consideration to the impact your decisions would have on each of the economic indicators.Your discussion might consider some of the following topics:government debt and the budget surplus or deficit; the impact of these recommendations on government services; how Canadians will benefit from the recommended policies in the short term and in the long term; the multiplier effect; any potential problems with your recommendations.These are just some suggestions.Your argument should discuss several ways that your ideas will impact the economy.The recommendations you discuss could include several of these areas but you can use any relevant course concepts to justify your recommendations.