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## Economics

 Basic Economics Macroeconomics Microeconomics Business Economics Econometrics International Economics Managerial Economics Game Theory Public Economics

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?

• Reference No.:- M921379

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