Question

Consider the following economy:lmathrmC=0.6(Y-T) I=1,000-20 r G=180 T=180 Mˢ=1,500 Mᴰ=Y-50 r

(a)Find the IS and LM curves.

Answer 1

The question involves calculating the equilibrium level of output in an economy using the Aggregate Expenditure model. The query specifically asks for determining the necessary change in government spending to reach a given potential GDP by solving for national income Y and using the expenditure multiplier method.

Step-by-step explanation:

The student is asking how to find the equilibrium in an economy based on certain economic parameters. The equilibrium can be found using the Aggregate Expenditure (AE) model, which is the sum of Consumption (C), Investment (I), Government spending (G), Exports (X), and less Imports (M). In an AE model, the equilibrium level of output (Y) occurs where Y equals AE. To determine the impact of government spending or taxes on reaching the full employment level of output, one can use these parameters to adjust and calculate the new equilibrium. When potential GDP is given, such as 3,500 in the example, you can either directly calculate or use the expenditure multiplier effect to determine the required change in government spending G.

Using the provided equation: Y = C + I + G + X - M, we replace C, T, I, G, X, and M with their respective expressions to solve for national income Y. After calculating Y, we can identify what changes to G are necessary to achieve equilibrium at potential GDP.