Question

For the following economy:

C = 1,800 + 0.6 (Y - T)

I = 900 G = 1,500

NX = 100

T = 1,500

a. Find the short-run equilibrium GDP algebraically.

b. Sketch the determination of the short-run equilibrium output using the Keynesian cross.

c. If potential GDP (Y*) were 9,000, what is the output gap [(Y-Y*)/Y*] in this economy?

d. If the natural rate of unemployment is 5%, what is the actual employment rate according to the Okun’s Law?

Answer 1