Closing the GDP gap
In a closed economy, the behavioral equations of households, firms and government are given below:
C = 200 + 0.75Yd
I = 160
G = 80
t = 20%
(a) Calculate the aggregate planned expenditure (AE) function.
(b) Find the equilibrium income.
(c) What is the value of the autonomous expenditure multiplier?
(d) If the government estimates the full-employment income at 1200, is there an inflationary or a recessionary gap?
(e) By how much should G be increased or decreased to remove the gap?