Given that the US economy production function (to calculate current GDP and potential GDP) is : GDP = Y= F(K,L,N) = 0.04K+0.03L+0.03N. The current GDP is produced with K=200, L=100, and N=100, the full employment GDP (potential GDP) can be potentially produced with K=225, L=150 , and N= 150. Given that the average MPS (not MPC) is 0.25 (for problems 1, 2, and 3), and active population is 100 millions. GDP is in Trillion dollars
To apply supply side economics, given that only 40% of the tax credits given to businesses are reinvested, how much tax credit do investors need to move the economy to the full employment level? You should assume that consumption and government spending are not going to change. Hint: First, find the GDP gap, then find out how much extra investment spending is required to fill up this gap. Finally, how much tax cut is needed for the businesses to stimulate the required additional investment spending, knowing that from every dollar of tax cut, businesses will invest only 40%?