Reference no: EM131017924

The U.S. economy is described by the following data:

C = 0.8 × (Y - T) + 40
IP = 70
G = 120
NX = 10
T = 150

Y* = 600

1. [Find consumption function that represents household spending in the U.S. economy. Find the planned aggregate expenditure function that represents aggregate demand. Find the short-run equilibrium output. Is there an output gap occurring in the U.S. economy?

2. Suppose that economic expansions in several countries abroad increased the demand for the U.S. goods and services; as a result, NX rises to 100. What is the new planned aggregate expenditure equation of the U.S. economy? What is the new short-run equilibrium output? Is the economy experiencing a recession or an expansion?

3. Suppose that despite the economic expansions in several countries, the economic slowdown in China and India had a bigger effect such that demand for U.S. exports actually have decreased, so that NX = - 100. What is the new planned aggregate expenditure equation of the U.S. economy? What is the new short-run equilibrium output? Is the economy experiencing a recession or an expansion?

4. Suppose that in trying to help eliminate the output gap that resulted in question # 3, the government performs a fiscal stabilization policy by changing government spending to move actual output back up to potential/long-run levels. Describe in words or illustrate through a flow chart how changing government spending leads to changes in actual output (use the components in the planned aggregate expenditure equation and the consumption function in your answer).

5. Suppose that in trying to help eliminate the output gap that resulted in question # 3, the government performs a fiscal stabilization policy by instead changing net taxes to move actual output back up to potential/long-run levels. Describe in words or illustrate through a flow chart how changing net taxes leads to changes in actual output (use the components in the planned aggregate expenditure equation and the consumption function in your answer).

6. How do your results in questions #2 and #3 help to explain the tendency of recessions and expansions to spread across countries?