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):
- What is the equilibrium level of GDP (in billions of dollars) in 2016? (report your answer to 2 decimal places)
- What is the current price level at the equilibrium level of GDP in 2016? (report your answer to 2 decimal places)
- what is the level of real GDP per capita in 2016 (report your answer to 2 decimal places)
- what is the balance of the government's budget in 2016 (report your answer to 2 decimal places)
Sample Solution