Change in Government Expenditure to reduce Output gap
Consider the following hypothetical economy.
This economy can be represented algebraically as:
Consumption: C = 100 + 0.75YD
Investment I = 200
Government Spending = 150
Net Taxes NT = 0.2Y
Exports X = 80
Imports M = 0.1Y
Disposable Income YD = Y-NT = Y - tY
Aggregate Expenditure AE = C+I+G+NX
Assume the general price level is constant.
a) Assume the government needed to eliminate this gap by using fiscal policy by changing government expenditures. Explain by how much government must change these expenditures to fill the output gap? Show your calculations.
b) Calculate the trade balance (NX) given equilibrium income found in part (d) above.
Graph the trade balance function, label the diagram, and identify the two points found.