Unformatted text preview: an economy.
g. Given your answer in part f, what fiscal tool would government use to eliminate the
output gap?
An expansionary fiscal policy is needed by increasing G or/and decreasing t.
Stabilizing output means an attempt to steer actual GDP to the potential GDP as close as
possible so that output gaps are eliminated or minimized. 2 SFU Econ 105 Week 7 Spring 2013 h. Given your answer in part g, suppose the government implements a fiscal stabilization
policy by changing both G and T. Given that a rise in G by 200 has been set, then what
net tax rate must be accompanied with the new G to stabilize output?
With a given level of G and a variable t, desired AE = 275 + 200 + [0.8(1t) – 0.15]*Y
The policy objective: YE = Y* = 1000 AE ( YE ) = YE = 1000
Setting AE as the following and solve for t
1000 = 475 + [0.8(1t) – 0.15]* 1000
t = 0.156 3...
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 Summer '08
 HANAFIAHHARVEY
 Economics, Macroeconomics, National Income, Assignments, output gap

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