Y = C + I + G + (X - IM) where: C = 400 + 0.8Y I = 50 G = 100 X = 50 IM = 100 An
ID: 1207722 • Letter: Y
Question
Y = C + I + G + (X - IM) where: C = 400 + 0.8Y I = 50 G = 100 X = 50 IM = 100 And also: Dl = Y - T + Tr T = 50 Tr = 150 YF = 5000 Solve for the equilibrium level of real output income (Y*) in this economy. Given the model above, the federal budget has a (dcficit/surplus/balance) equal to S_____. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap in the model? How much is the gap equal to? Suppose the President and Congress choose to eliminate the output gap by using discretionary fiscal policy and focusing on transfer payments. What would be the new value of transfers (Tr) needed to achieve the goal of full-employment? Suppose the national debt equaled $6000 prior to the change in transfer payments. What would be the value of the national debt after this policy action?Explanation / Answer
(1) In equilibrium, Y = C + I + G + X - IM
Y = 400 + 0.8 x DI + 50 + 100 + 50 - 100
Y = 500 + 0.8(Y - T + Tr)
Y = 500 + 0.8(Y - 50 + 150)
Y = 500 + 0.8(Y + 100)
Y = 500 + 0.8Y + 80
(1 - 0.8)Y = 580
0.2Y = 580
Y = 2,900
(2) Budget balance = T - G
= 50 - 100 = - 50 (Deficit)
(3) If YF = 5,000, then there is a recessionary gap because actual output < YF.
Recessionary gap = YF - Y = 5,000 - 2,900 = 2,100
Note: First 3 questions are answered.
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