C = 0.8(DI) + 5000 C = Consumption expenditure, DI = Disposable Income
I = 2800 I = Investment expenditure
G = 4000 G = government expenditure
X = 2500 X = spending on exports
M = 3500 M = spending on imports
DI = Y - T Y = real GDP, T = tax revenues/>
T = 1000Two fiscal policy options available to government are to change government spending (G) or changes taxes (T). Note that if government increases spending without changing taxes, government must be borrowing money to do so. Use the equations above to show how changes in G or T affect equilibrium GDP.
a. If (only) G increases by 10,000, then equilibrium GDP changes by
2000
b. If (only) T increases by 10,000, then equilibrium GDP changes by
One option that government has with fiscal policy is to engage in balanced budget spending (i.e., increase both G and T by equal amounts – e.g. increase both G and T by 5000).
c. Assume there’s an output gap of 10,000 (i.e. Yp – Y* = 10,000), and so government’s goal is to increase equilibrium GDP by 10,000. If government seeks to increase equilibrium GDP by 10,000, but do so with balanced budget spending (i.e. through an equal increase in G and T), then government must increase G and T by