Q. You are given the following information about an economy: C = 0.80DI; I = 200; G = 500; (X-IM) = -30; T = (1/4)Y.
1. Find Equilibrium GDP (Y). If potential GDP is 1950, is the economy in a recessionary or inflationary gap? Explain.
2. Suppose that the MPC, falls to 0.75, so C = 0.85DI. Find Equilibrium GDP and compare to your answer to part 1.
3. Assume that the MPC is 0.80 again, so C = 0.80DI. Suppose that the tax rate changes so T = .3Y instead of (1/4)Y. Find GDP and compare your answer to part 1.