Unformatted text preview: Using the AE function in part a, compute the equilibrium level of national income.
In equilibrium, AE (YE) = YE
275 + 0.45 YE = YE and solve for YE
YE = 500
d. Suppose the actual national income is 200. What unintended changes would occur? Also
what would happen to the level of actual investment expenditures?
At Y = 200, desired AE is greater than Y ( = actual national output). As a result, actual
national inventories are being depleted, and this stimulates output to rise until AE =Y =
e. Suppose there is a sudden increase in the desired investment expenditure by 250. Then,
what would be the new level of equilibrium national income? (Hint: use the simple
∆A =∆I = +250 and simple multiplier = 1.82 (from part b),
then ∆YE = simple multiplier x ∆I = 1.82x(+250) = +455
New level of YE = 500 + ∆YE = 955
f. Suppose the given level of potential output is 1000. What output gap would this economy
face at Ye found in part c? What would be economic costs associated with this output gap?
Since YE = 500 is less than Y*, there is a recessionary output gap.
The economic costs associated with the recessionary output gap would be lower incomes
or output level, higher unemployment, lower level of investment, inefficient use of
economic resources or presence of idle resources in...
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