Consider the following hypothetical economy: Y I G (X-IM)

2,500 360 200 -100

3,000 360 200 -100

3,500 360 200 -100

4,000 360 200 -100

4,500 360 200 -100

Taxes are 200 for all levels of GDP, and consumption function for this economy is given by: C= 400 +.8DI

a- Find the equilibrium level of GDP numerically and graphically. (Graph paper can be downloaded from “Course Materials” page of Bb.)

b- At equilibrium level of GDP how much is being saved?

c- If potential GDP for this economy is 4,000 what is the magnitude of inflationary (recessionary) gap?

d- If government increases G by 100, what will be the new equilibrium level of GDP?

e- If the government instead cuts the taxes by 100, what will be the new equilibrium level of GDP?

f- Show the impact of parts d and e in your graph.