Question

Given the following information for the Macro Economy answer the following questions.

In this economy we have an MPC equal to 0.60, Autonomous Consumption of $100 billion, Planned Investment (I) of $1,000 billion, Government Spending (G) of $1,200 billion and Net Taxes (T) of $500 billion.

a) Fill in the missing data in the table below (all the numbers are in billions).

Y	T	Yd	C	S	AE
$2,000	500	1,500	1,000	1,000	3,200
$3,000	500	2,500	1,600	1,400	3,800
$4,000	500	3,500	2,200	1,800	4,400
$5,000	500	4,500	2,800	2,200	5,000
$6,000	500	5,500	3,400	2,600	5,600
$7,000	500	6,500	4,000	3,000	6,200
$8,000	500	7,500	4,600	3,400	6,800
$9,000	500	8,500	5,200	3,800	7,400
$10,000	500	9,500	5,800	4,200	8,000

a) If this economy had a full employment level of income equal to $8,000 billion, what Macroeconomic condition is this economy experiencing. Explain your answer.

b) Using the Spending Multiplier, determine the change in G that is needed to get this economy to be in equilibrium at full employment. Please clearly show your work.

c) Using the Tax Multiplier, determine the change in T that is needed to get this economy to be in equilibrium at full employment. Please clearly show your work.

Answer 1

767 At Y=88000 AE AD = c + It l = 7400 6800 and at this y=8000 & Y> BAE so, aggregate expenditure has to be increased to reach equm. At this paint economy is ty experiencing recessionary gap. ARAYAR by AY = T-mpc on 8000 - 6800 7-006 on 1200 x (0.4) = Au I AY $480 billion so government spending must be increand by $480 billion, - mp с др у ди - Impe 1-0.6 on 1200 = -0°6 AT - 480 = AT , AT = - 800 so, rax must be densmeared by $800 billion.