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Now, consider another, more elaborate open economy characterized by the following equations - the economy is not necessarily at full employment:...

Now, consider another, more elaborate open economy characterized by the following equations – the economy is not necessarily at full employment: (numbers in billions)
C = 500 + .9(PDI) (C is Consumption, PDI is Y- Tx)
I = 400 (I is Investment)
G = 400 (G is Government Spending)
Tx = 300 (Tx is Government taxes)
X-M = 50 (X is exports, M is imports)
a. What is equilibrium income in this economy?





Equilibrium Income = _________
b. What is the multiplier?



c. Is the Government running a deficit or a surplus?



The government budget has a ____________ of _________
d. Now, let Government spending drop by 100. What is the new equilibrium income? Now,
what is the government deficit or surplus?


New Equilibrium Income = _________


Now, government has a ____________of _________

e. Now, suppose that full employment income is $12,000 billion (12 trillion). What needs to happen to Aggregate Expenditures to get the economy to that level? What kind of gap is the economy facing?



f. What can the government do to close the gap?
That is, by how much does government need to change G, or Tx to close the gap?



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