THE AGGREGATE EXPENDITURE MODEL (IN THE SHORT RUN) YOU MUST SHOW YOUR CALCULATIONS IN THE SPACE BELOW FOR THE NEXT PROBLEM USE THE FOLLOWING FORMULA: CHANGE IN GDP = [ - MPC / (1-MPC) ] * CHANGE IN T

Initially, the economy is producing well below the level of potential output of $16 trillion in goods and services. Also, currently net taxes is $2.6 trillion. According to precise government's estimates, the government believes that by reducing net taxes to $1.7 trillion the economy will achieve full employment.

Assume that the marginal propensity to consume is 0.7 (MPC=0.7).

a) What is the value of the net taxes multiplier? Explain

b) Could you compute the initial level of output in the economy? Explain