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Q4

An economy is described by the following equations: C = 6,000 + 0.5 (Y – T) I p = 2,000 G = 4,500 NX = 500 T = 4,000 Y* = 21,000

a. For this economy, find the numerical equation linking planned aggregate expenditure to output.

b. Find the following: autonomous expenditure, the multiplier, short-run equilibrium output, and the output gap.

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

d. Calculate the amount by which autonomous expenditure would have to change to eliminate the output gap.

e. Suppose that the government decided to close the output gap by increasing taxes. By how much must taxes be increased in order to do this?