Assume that the consumption function is given by C = 200 + 0, 75(Y − T ). Investment is 100; government purchases and taxes are both 100.
a)This economy has TODAY a GDP of 1700, is this an equilibrium level of GDP? (HINT: Find the AS the AD and compare them).
b)Will the GDP NEXT WEEK increase or decrease? (HINT: looking to your previous answer see if AS is lower or higher than AD, then think what will happen to production in order to bring the economy back to equilibrium)
c)What is the equilibrium level of income (GDP)? ii) Describe the process that brings the economy back to equilibrium (using the MAGIC of words).
d)If government purchases increase to 125, what is the new equilibrium income?. E)What level of government purchases is needed to achieve an income of 1,600?
