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Change in Government Expenditure to reduce Output gap

Consider the following hypothetical economy.

This economy can be represented algebraically as:

Consumption: C = 100 + 0.75YD

Investment I = 200

Government Spending = 150

Net Taxes NT = 0.2Y

Exports X = 80

Imports M = 0.1Y

Disposable Income YD = Y-NT = Y - tY

Aggregate Expenditure AE = C+I+G+NX

Assume the general price level is constant.

a) Assume the government needed to eliminate this gap by using fiscal policy by changing government expenditures. describe by how much government must change these expenditures to fill the output gap? Show your calculations.

b) find out the trade balance (NX) given equilibrium income found in part (d) above.

Graph the trade balance function, label the diagram, and identify the two points found.

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M921382

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