A simple macroeconomic model of an economy is estimated at end of 2009 giving the following information:
Y = C + I + G + X-IM
C = 100 + 0.8 YD
YD = Y - T + TR
IM = 20 + 0.4Y
I = 50; G = 60; TR = 70; X = 80; T = 0.2Y
Price level: GDP deflator 110 (2006/)
Where C denotes consumption expenditure, I level of investment, G government expenditure, X exports, IM imports, YD disposable income, Y real GDP, T tax revenue, TR transfer payments (Think of C, I, G etc as being measured in millions of dollars)
What is the equilibrium level of real GDP?
Show the economy's macroeconomic equilibrium using two sets of diagrams:
i) the AE diagram (Keynesian cross diagram)
ii) the typical AD-AS diagram.
iii) Indicate the equilibrium expenditure, equilibrium real GDP, and the equilibrium price level using actual figures.
Determine the size of the autonomous expenditure multiplier, and comment on what happens to the multiplier if there is no foreign trade?
If the full employment level of GDP is $750m, calculate the size and the type of output gap persistent in the economy.
Calculate the change in government expenditure required to eliminate the output gap in part d above.