Question

An economy is described as follows:

C	= 400 + 0.6(Y – T)
I p	= 200
G	= 200
NX	= 60
T	= 100
Y*	= 2,100

a. For the economy described above, find autonomous expenditure, the multiplier, short-run equilibrium output, and the output gap.

Instructions:  Enter your responses as absolute values.

Autonomous expenditure:   

Multiplier:   

Short-run equilibrium output:   

There is  (Click to select)  a recessionary  an expansionary  no  output gap in the amount of  .


b.  Illustrate this economy’s short-run equilibrium on a Keynesian cross diagram.

Instructions: On the graph below, use the line tool 'PAE' to draw the aggregate expenditure line using the points at Y = 1,500 and Y = 2,500 only. Then use the point tool 'Short-term eq.' to identify the equilibrium level of income and expenditure.

c. By how much would autonomous expenditure have to change to eliminate the output gap?
Autonomous expenditure would need to   (Click to select)  decrease  increase  by  to eliminate the output gap.

Answer 1

PAE = ct Ie ta tnx - 400 +0.6CY - 100 + 200 + 200 +60 800 +0.64 Autonomous expenditure - 800 Multiplier = L = 2.5 1-06 Short nun equilibrium output = 2000 There is recessionary gap At equilibrium, Y= 800 +0.64 Y=2000 PAE - 800 to 0.64 when y = 1500 PAE = 800 +0.6C1500)= 1700 when Y=2500, PAE - 800 to 6 (2500) = 2300 45' line Expenditus PAE 2 500+ Equilibrium 1700 800 1500 2000 2500 Short term equilibrium - 2000 output gesp = mec actonomous expenditure Impc 2100 - 2000 & I o autonomy expenditure -0.6 Autonomous expenditure would need to increase by 40