Consider the following hypothetical economy:
Y I G (X-IM)
2,500 360 200 -100
3,000 360 200 -100
3,500 360 200 -100
4,000 360 200 -100
4,500 360 200 -100
Taxes are 200 for all levels of GDP, and consumption function for this economy is given by: C= 400 +.8DI
a- Find the equilibrium level of GDP numerically and graphically. (Graph paper can be downloaded from “Course Materials” page of Bb.)
b- At equilibrium level of GDP how much is being saved?
c- If potential GDP for this economy is 4,000 what is the magnitude of inflationary (recessionary) gap?
d- If government increases G by 100, what will be the new equilibrium level of GDP?
e- If the government instead cuts the taxes by 100, what will be the new equilibrium level of GDP?
f- Show the impact of parts d and e in your graph.