Suppose the economy reaches equilibrium GDP at $1,250,000 while potential GDP is at $1,500,000. Currently G=$180,000 while taxes are equal to 0.1Y (where Y is the same as real GDP). a. How large is the recessionary gap in this economy? b. At equilibrium GDP, is there a budget surplus or deficit? Solve for the value of this surplus or deficit. C. At the potential GDP, is there a surplus or deficit? Solve for the value of the full- employment surplus or deficit. d. Does there exist a cyclical surplus or deficit? Solve for its value

Suppose the economy reaches equilibrium GDP at $1,250,000 while potential GDP is at $1,500,000. Currently G=$180,000 while taxes are equal to 0.1Y (where Y is the same as real GDP). a. How large is the recessionary gap in this economy? b. At equilibrium GDP, is there a budget surplus or deficit? Solve for the value of this surplus or deficit. C. At the potential GDP, is there a surplus or deficit? Solve for the value of the full- employment surplus or deficit. d. Does there exist a cyclical surplus or deficit? Solve for its value

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by changing toxes to reduce the burden of this recession. Fiscal Policy 140 LRAS AS 130 120 110 100 90 80 70 AD 60 50 AD, 40 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars) Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. a. How much does oggregate demanci need to change to restore the economy to its long-run equilbrilum? billion b. If the MPC is 0.667, how much do taxes need to change to shift aggregate demand by the amount you found in part a? billion Suppose instead that the MPC is 0.5. C. How much does aggregate demand and taxes need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ [ billion and taxes need to change by $ billion. Price Level
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4. In the US the unemployment rate for January 2000 was 4.0%. In January 2000, the US had GDP of $10.04 trillion, while potential GDP for the same year was $9.47 trillion. Assume the marginal propensity to consume is 0.93. a. What is the GDP gap in January 2000? b. Using the concept of the spending multiplier, in theory, how much would government spending have to change to close the gap? c. Using the concept of the tax multiplier, in theory, how much would taxes have to change to close the gap?