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Problem 2 (15%) Year Actual Real GDP Potential GDP Price Level Unemployment 2017 KD 13
Problem 2 (15%) Year Actual Real GDP Potential GDP Price Level Unemployment 2017 KD 13.4 billion KD 13.4 billion 100 7% 2018 KD 11.5 billion KD 13.4 billion 96 16% 1. Describe country's macroeconomic condition in these two years in terms of macroeconomic equilibrium and business cycle. What happened in the economy in 2018? 2. If the government purchases multiplier is 3 and the tax multiplier is -1.5, a) By how much will government purchases need to be changed to bring the economy to equilibrium at potential GDP? b) By how much will taxes have to be changed to bring the economy to equilibrium at potential GDP?
Expert Solution
ANSWER:
1) Generally Potential GDP is same in both of the years while actual GDP fell in 2017. It result in the fall in price and also rise in unemployment rate. There must be recessionary gap in economy in 2018 where actual GDP fell below potential level which decrease overall agrregate demand of goods thereby reducing the price level.
2) Government purchase multiplier = 3.
Tax multiplier = -1.5
Gap in GDP in 2018 = Potential GDP - Actual GDP
= 13.4 billion - 11.5 billion
= 1.9 billion.
a) Government spending have to rise by the (GDP Gap / Purchase multiplier)
= 1.9 / 3
= 0.633 billion.
b) Tax have to fall by (GDP Gap/ Tax Multiplier) = (1.9 / 1.5) = 1.26 billion.
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