The University of Western AustraliaECON 1102 QUESTION ONE Read the article below “Brother Can You Spare a Dime?” taken from Layton et al

The University of Western AustraliaECON 1102

QUESTION ONE

Read the article below “Brother Can You Spare a Dime?” taken from Layton et al. (2016). Economics of Today and answer the following question. Using the Keynesian model illustrate the concept of a contractionary gap and unemployment.

QUESTION TWO

The real GDP for the country of Recession is 4300 at full employment. However, current GDP in Recession is equal to PAE = 940 + 0.6Y.

1. Using the Keynesian model, calculate and illustrate and explain the current situation in Recession.

2. How much should the Government of Recession increase its budget expenditure by to bring Recession to a situation where actual GDP is equal to potential GDP?

3. The country of Austland has a central bank entitled the “Central Reserve of Austland’s People” (CRAP for short). Currently CRAP is run by a group of experienced economists who obviously never took ECON1102. If Austland is currently at full employment, using the Keynesian model, illustrate and explain the impact on the economy if CRAP decided to cut the cash rate of interest.