Question description
An economy is described by the
following data:
C = 40 + 0.8 × (Y –
T)
IP = 70
G = 120
NX = 0
T = 150
Y* = 600
1. [3 points] Find the planned aggregate
expenditure equation that represents aggregate demand for this economy. Find
the short-run equilibrium output. Is there an output gap occurring in this
economy?
2. [2 points] Suppose that economic expansions
abroad increases the demand for the country’s exports; as a result, NX rises to
100. What is the new short-run equilibrium output? Is the economy experiencing
a recession or an expansion?
3. [2 points] Suppose instead that foreign
economies are slowing, reducing the demand for the country’s exports, so that
NX = – 100. What is the new short-run equilibrium output? Is the economy
experiencing a recession or an expansion?
4. [1 point] Suppose that in trying to help
eliminate the output gap that resulted in question # 3, the government performs
a fiscal stabilization policy by changing government spending to move
actual output back to potential/long-run levels. Illustrate through a flow
chart how changing government spending leads to changes in actual output
(use the components in the planned aggregate expenditure equation and the
consumption function in your answer).
