Homework Answers
8. A) The economy's full employment GDP level is $8000 million and actual GDP is $8434 million.
As actual GDP exceeds potential GDP, therefore the economy is in an inflationary period.
B) Investment multiplier = 2.8
Change in output = investment multiplier * change in investment
Or, $(8000 - 8434) million = 2.8 * change in investment
Or, change in investment = -$434 million /2.8 = - $155 million
Therefore, investment needs to decrease by $155 million for the economy to reach full employment.
C) Tax multiplier = 2.0
Change in output = tax multiplier * change in taxes
Tax multiplier is always negative because increase in taxes decreases income/output and decrease in taxes increases income/output.
Therefore,
- $434 million = -2 * change in taxes
Or, change in taxes = $217 million
Therefore, taxes need to increase by $217 million for the economy to reach full employment.
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