question and answer

Let the consumption function, the amount of desired investment by firms and the amounts of government spending and taxation be:

C=100+(2/3)*Y and I=200 and G=600 and T=300+(1/6)Y

GDB Gap is initially 27

a) What is the equilibrium level of income and output (Y)

b) What is the spending multiplier

c) Suppose the economy is operating below potential output by the amount of the GDP gap. By how much must government spending rise in order to bring the economy to full employment output?

d) What is the tax multiplier?

e) How large a change in taxes is needed to bring the economy to full employment? (This would be a tax break a reduction in the constant term in the tax equation. Don’t forget the negative sign.)

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