Question 5

An economy is described by the following equations:

C = 4000 + 0.6 (Y - T)

Ip = 1500

G = 2000

NX = 200

T = 2000

Y* = 17000

a. For the economy, find the following: autonomous expenditure, the multiplier, short-run equilibrium output, and the output gap if any. (4 marks)

b. Illustrate this economy's short-run equilibrium on a Keynesian-cross diagram. (4 marks)

c. Calculate the amount by which autonomous expenditure would have to change to eliminate the output gap if any. (3 marks)

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d. Suppose that the government decided to close the output gap by changing taxes. By how much must taxes be increased or decreased in order to eliminate the output gap if any? (4 marks)

Solution guide: