Consider
the following information on an economy
(all values are in trillions of 2005 dollars):
a. Calculate equilibrium real GDP.
b. Now suppose that all the information given
in part (a) remains the same except that taxes
equal $2.0 trillion and transfers equal $1.5 trillion.
Calculate equilibrium real GDP.
c. Now suppose that potential GDP equals $15.0
trillion. If equilibrium real GDP equals the
amount you calculated in part (b), use the
value for the government purchases multiplier
to calculate how much government purchases
would have to change for equilibrium GDP
to equal potential GDP (assuming that taxes
remain unchanged). Use the value for the tax
multiplier to calculate how much the government
has to change taxes for equilibrium
GDP to equal potential GDP (assuming that
government purchases remain unchanged).
Use a graph to illustrate your answer.