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Based on research conducted by the Department of Economic Analysis, the government and policy advisors of an economy believe that the full employment GDP is $7500 billion, and Pe, the overall expected price level is 118. In addition, the researchers estimate that the short run aggregate supply equation is Y = Ypot 80 (P- Pe), where Ypot is the potential level of output. In 2016, the population was 400 million, and the structure of the economy was described by the following equations for household consumption behavior and taxes received: C=100+0.8DI, and T =0.25Y where all monetary values are in billions of dollars. Government spending was fixed at $1700 billion, and the firm’s investment behavior was fixed at $800 billion. Trading is allowed in this economy and in 2016, trading occurred such that the trade account was balanced. That is, net exports (X-IM) was equal to zero.

After Reading the above plot, answer the following questions (1-7):

1. What is the equilibrium level of GDP (in billions of dollars) in 2016? (report your answer to 2 decimal places)

2. What is the current price level at the equilibrium level of GDP in 2016? (report your answer to 2 decimal places)

3. what is the level of real GDP per capita in 2016 (report your answer to 2 decimal places)

4. what is the balance of the government’s budget in 2016 (report your answer to 2 decimal places)

5. Fill in the blanks from the following options (You can use one option more than once): 

an inflationary Gap/a recessionary gap/deficit/equilibrium level of GDP/full employment level of GDP/negative/positive/Surplus

Question: In 2016 the ______ was greater than _______ and the government’s budget balance was _______. From this we can conclude that the economy was in ______ and the government was operating with a ______.

6. What is the spending multiplier in this economy? (report your answer to 2 decimal places)

7. what is the tax multiplier multiplier in this economy (report your answer to 2 decimal places)

Now consider that in the following year (2017), the government decided to implement a policy aimed at moving the economy to full employment. In its decision to move the economy to full employment, they used government spending as the policy tool. The structure and fixed spending behaviors remain the same as they were in 2016, except for government spending In addition. changes to the population’s birth, mortality, and net migration levels were such that the population remained at 400 million. The policy was implemented, and it was successful in achieving its primary purpose.

Now answer the questions from 8-14:

8. What was the change in government spending (in billions of dollars) that was necessary to move the economy to full employment in 2017? (report your answer to 2 decimal places)

9. What was the change in the equilibrium level of real GDP (in billions of dollars) that resulted from the government’s policy in 2017? (report your answer to 2 decimal places)

10. What was the percentage change in the overall price level that resulted from the government’s policy in 2017? (report your answer to 2 decimal places)

11. what was the change in real GDP per capita that resulted from the government’s policy in 2017(report your answer to 2 decimal places)

12. What was the change in the government’s budget balance from the government’s policy in 2017? (report your answer to 2 decimal places)

Fill in the blanks from the following options (You can use one option more than once): 

a contractionary fiscal / an expansionary fiscal / balanced/decreased/decreasing/deficit/deflation/did not change/had a larger/had a smaller/had the same/higher/increased/increasing/inflation/lower/not balanced/now had a/surplus

In 2017 with a desire to move the economy to Full Employment the government successfully implemented ______ aimed at output. To achieve this goal, they _______ government spending in 2017. As a result, compared to the levels in 2016, real GDP was _____, real GDP per capita was _______,  and the change in the price level resulted in the economy experiencing ______ over the year. In addition, the government’s budget was _______. Specially, the government _______ budget _______.

Now suppose that a new government is installed in 2018. Unlike the preceding government, the new government is concerned about the government’s budget balance from 2017. Specifically, the government would like to achieve a balanced budget. To achieve this goal, the new government decided to use net taxes (specifically, fixed taxes) as its policy tool. The structure and fixed spending behaviors remain the same as they were in 2017 except for fixed taxes (which is currently equal to zero). In addition, changes in the population’s birth, mortality, and net migration levels were such that the population remained at 400 million. The policy was implemented, and it was successful in achieving its primary purpose. Answer 14-20:

14. What was the change (from 2017) In net taxes (in billions of dollars), specifically fixed taxes, that was necessary to achieve a balanced budget in 2018? (report your answer to 2 decimal places)

15. What was the change (from 2017) in the equilibrium level of real GDP (in billions of dollars) that resulted from the government’s policy in 2018? (report your answer to 2 decimal places)

16.What was the percentage change (from 2017) in the overall price level that resulted from the government’s policy in 2018? (report your answer to 2 decimal places)

17. What was the change (from 2017) in Real GDP per capita, the resulted from the government’s policy in 2018? (report your answer to 2 decimal places)

18. What does the change (from 2017) in the government budget balance the resulted from the government’s policy in 2018? (report your answer to 2 decimal places)

19. Fill in the blanks from the following options (You can use one option more than once): 

a contractionary fiscal/an expansionary fiscal/balanced/decreased/decreasing/deflation/did not change/government spending/higher/increased/increasing/inflation/lower/net taxes/now had a/still not balanced

In 2018 with a desire to balance the government’s budget the government successfully implemented ______. To achieve these goals, they changed _______ in 2018. As a result, by______ ______, the government’s budget was ______. Furthermore, compared to the levels in 2017, real GDP was ______, real GDP per capita was ______, and the change in the price level resulted in the economy experiencing _______ over the year. 

20. Fill in the blanks from the following options (You can use one option more than once): 

A greater/a smaller/decrease in government spending/ decrease in net taxes/increase in government spending/increases in taxes/no/no change in government spending/no change in their taxes

Compared to the ______ in 2017, we can conclude that the ______ in 2018 lead to ______ absolute change in the overall price level and ______ absolute change in Real GDP.