Use the following macroeconomic model to answer the questions from 1 through 12:

Question

Use the following macroeconomic model to answer the questions from 1 through 12: You must show your work of estimation to obtain the credits.

C = 200 + 0.75Yd; C = consumption function; Yd = disposable income (Y-T)

T = 200; T = Tax revenue

I = 200; I = Investment

G = 300; G = Government expenditure

Yf = Full Employment RGDP (Potential RGDP) = 3,000

1. Estimate the equilibrium GDP level (income).

2. At the equilibrium level of output you estimated for Q1 above, estimate the aggregate consumption level

3. At the equilibrium level of output you estimated for Q1 above, estimate the aggregate saving level.

4. The MPC and MPS for the economy is respectively:

5. The expenditure multiplier for the economy is:

6. The tax multiplier for the economy is:

7. If the Tax amount is reduced from $200 to $100, estimate the equilibrium GDP level (income).

8. With Tax amount keeping at $200, if Government spending (G) is increased from previous level of $300 to $400, estimate the equilibrium level of GDP.

9. With Government spending keeping at $300, if the tax amount is increased from $200 to $300, estimate the equilibrium level of GDP.

10. With Tax amount keeping at $200, if government spending is reduced from $300 to $200, estimate the equilibrium level of GDP.

11. Using the data for potential RGDP in the above Macroeconomic model, and using the estimated equilibrium RGDP from Q1 answer, what is the level of GDP gap?

12. Based on your answer to Q11, what is the level of recessionary or inflationary gap?

Explanation / Answer

1.

C = 200 + 0.75Yd

Yd= Y-T

Y=C+I+G+X-M = 200 + 0.75(Y-T)+I+G+(X-M)

0.25Y= 200+200+300-0.75*200 = 550

Y equilibrium = 2200

2. C= 200+.75(Y-T) = 200+.75*(2200-200) = 1700

3. S= disposable income-consumption = Yd-C = 2200-200-1700 = 300

4. MPC= dC/dYd = .75 (differentiating consumption equation, coefficient of Yd)

MPS + MPC =1

MPS=.25

5.

Y=C+I+G+X-M = 200 + 0.75(Y-T)+I+G

.25Y = 200+I+G-.75T

Y=800+4I+4G-3T

Government expenditure multiplier is 4

6. Tax multiplier is 3

7. Y= 800+4I+4G-3T = 800+800+1200-3*100 = 2500

8. Y=  800+4I+4G-3T = 800+800+1600-600=2600

9.Y=800+4I+4G-3T=800+800+1200-900=1900

10.Y=800+4I+4G-3T=800+800+800-600=1800

11.

12.

If real GDP < Potential real GDP (full employment GDP), then a recessionary gap exist

If real GDP > Potential real GDP (full employment GDP), then an inflationary gap exist.

So there exist inflationary gap

Question Num I G T Y GDP Gap 7 200 300 100 2500 800 8 200 400 200 2600 900 9 200 300 300 1900 200 10 200 200 200 1800 100

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