Consider an economy with the following characteristics (all variables measured in billions of dollars).
C = 40 + 0.6Yd
10.5
1 15
G – 20 X – 5
M= Q.IY
Where Yd is disposable income and t is the income tax rate.
(a) Calculate the equilibrium GDP.
(b) At the equilibrium GDP, calculate the fiscal balance.
(c) If the full employment GDP is $80 billion, is the economy experiencing a recessionary or inflationary gap? Explain your answer.
(d) If the government wants to close the gap, should government increase or decrease expenditure? By how much? show work
