Final answer:
The equilibrium level of an economy is found by equating national income with aggregate expenditure using provided economic parameters. Equilibrium can be determined either by direct substitution or by calculating the multiplier effect to adjust government spending.
Step-by-step explanation:
The subject of the question relates to finding the equilibrium level of an economy using various macroeconomic equations and parameters. The equilibrium can be determined by setting national income equal to aggregate expenditure, which essentially is the sum of consumption (C), investment (I), government spending (G), exports (X), and subtracting imports (M). The student is provided with equations for taxes (T), consumption (C), investment (I), and sometimes government spending (G), exports (X), and imports (M).
One way to find equilibrium is through a direct substitution of the potential GDP into all the given equations and solving for the necessary variable, such as government spending (G). Alternatively, one could calculate the multiplier effect and use it to determine the necessary change in government spending to achieve the full employment level of output. In this case, the equations provided involve national income, taxes as a function of national income, and consumption as a function of disposable income (Y - T).
To give an example, if the current government spending is $200 and potential GDP is $3,500, we can use the given parameters to solve for the equilibrium. For instance, using the equation C = 400 + 0.85(Y - T) and others provided in the question, we can solve for national income (Y) and subsequently for the required government spending to reach potential GDP.