Question

Suppose you are put in charge of fiscal policy for the economy in which tax collections are always $400 and in which the four components of aggregate demand are as follows: (X-IM) (Dollars) (Dollars) GDP (Rollars) 1,360 1,480 Taxes (Dollars) 400 400 200 DI (Dollars) 960 1,080 1,200 1,320 1,440 30 (Dollars) 720 810 900 (Dollars) 500 500 200 Total Real Expenditure (TE) (Dollars) 1,450 1,540 1,630 1,720 1,810 1,600 400 200 500 30 1,720 400 400 1,840 1,080 200 500

Answer 1

Ans: True

Explanation:

From the table, it is seen that GDP = TE = $1,720. This is called equilibrium GDP. Thus, the statement is true.

Ans:

• Raise taxes to $520            [i.e., 400 + 120]
• Increase government purchases to $620.     [i.e., 500 + 120]

GDP($)	Taxes($)	DI($)	C($)	I($)	G($)	X-IM ($)	TE($)
1360	520	840	630	200	620	30	1480
1480	520	960	720	200	620	30	1570
1600	520	1080	810	200	620	30	1660
1720	520	1200	900	200	620	30	1750
1840	520	1320	990	200	620	30	1840

   Ans: False

Explanation:

The equilibrium occurs at GDP equals to $1,840. Thus, the statement is false.