1) If C = 1000 + 7/8[GDP-1000], I = 700 and G = 1000 and the economy is currently in equilibrium at 400 below full employment GDP, the correct fiscal policy would be to increase G by?
2) If C = 500 + 3/4[GDP- 100], I = 300, G = 400, Xn =- 10 and full employment GDP is 210 less than current GDP, the proper action would be to increase taxes by?
705
3987.5
Thanks Alice for trying, but that's not correct, the first answer is 50 I figured it out, but I'm still having a hard time with the 2nd question.
To answer the first question, we can use the given equation C = 1000 + (7/8)(GDP - 1000), where C represents consumption, GDP represents the gross domestic product, and G represents government spending.
In equilibrium, when the economy is at full employment GDP, all leakages (savings and taxes) equal all injections (investment and government spending), which means that C + S + T = I + G + Xn.
Given that I = 700, G = 1000, and the economy is currently in equilibrium at 400 below full employment GDP, we can substitute these values into the equation:
C + S + T = I + G + Xn
C + 0 + 0 = 700 + 1000 + 0 (since there are no savings or taxes mentioned in the question)
C = 1700
Now, we know that the economy is currently 400 below full employment GDP, so we can set up another equation:
C = 1000 + (7/8)(GDP - 1000)
1700 = 1000 + (7/8)(GDP - 1000)
700 = (7/8)(GDP - 1000)
GDP - 1000 = (8/7)(700)
GDP - 1000 = 800
GDP = 1800
Therefore, the full employment GDP is 1800. Since the current GDP is 400 below full employment GDP, the current GDP is 1400 (1800 - 400).
To find the correct fiscal policy, which is to increase G (government spending) by a certain amount, we need to determine how much G should be increased to reach the full employment GDP.
GDP = C + I + G + Xn
1400 = 1700 + 700 + G - 10 (substituting values into the equation)
1400 = 2400 + G - 10
G = -990 (by re-arranging the equation)
To achieve full employment GDP, government spending (G) needs to be increased by 990.
Now, let's move on to the second question.
In the second question, we can use the given equation: C = 500 + (3/4)(GDP - 100), where C represents consumption, GDP represents the gross domestic product, and G represents government spending.
Again, in equilibrium, when the economy is at full employment GDP, all leakages (savings and taxes) equal all injections (investment, government spending, and net exports), which means that C + S + T = I + G + Xn.
Given that I = 300, G = 400, Xn = -10, and full employment GDP is 210 less than current GDP, we can substitute these values into the equation:
C + S + T = I + G + Xn
C + 0 + 0 = 300 + 400 - 10 (since there are no savings or taxes mentioned in the question)
C = 690
Now, we know that full employment GDP is 210 less than the current GDP, so we can set up another equation:
C = 500 + (3/4)(GDP - 100)
690 = 500 + (3/4)(GDP - 100)
190 = (3/4)(GDP - 100)
GDP - 100 = (4/3)(190)
GDP - 100 = 253.33
GDP = 353.33
Therefore, the full employment GDP is 353.33. Since the current GDP is 210 greater than full employment GDP, the current GDP is 563.33 (353.33 + 210).
To find the proper action, which is to increase taxes by a certain amount, we need to determine how much taxes (T) should be increased to reach full employment GDP.
GDP = C + I + G + Xn
563.33 = 690 + 300 + 400 - 10 (substituting values into the equation)
563.33 = 1390
No increase in taxes is required since the current GDP is already below full employment GDP by 826.67 (1390 - 563.33).