Equilibrium income using multiplier model and graphical representation of short-run Aggregate Demand and Supply Model
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) Using the multiplier model, compute the value of equilibrium income (Y).
b) Now assume full-employment equilibrium output is 1000. Illustrate what type of output gap exists and elucidate how much is the output gap? Use an aggregate demand (AD) and short run aggregate supply (AS) model to show the output gap graphically?