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Answer to Question #37198 in Macroeconomics for Adam

Question #37198
Consider a mythical economy. Investment spending is $6000, government spending on goods & services is $3000, and net exports are -$600. Taxes and consumption spending are given by the following two expressions:

T = $3,000 + (1/6)Y and C = $9,000 + (4/5)D.I.

A. Find the equilibrium level of GDP.

B. At equilibrium, what is the value of the government budget deficit (and which is it, deficit or surplus)?

C. Suppose I is increased TO $7500. Find the new equilibrium GDP and the value of the multiplier effect for the change in I.

D. Ignore part C (i.e.,go back to the original level of I & Y in part A). Suppose potential GDP is $37,800.

i) Using G as a fiscal policy tool, by how much (and increase or decrease) should G be changed to close the gap?

(ii) Instead of using G, use fixed T as a fiscal policy tool. By how much (and increase or decrease) should T be changed to close the gap?
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