Consider the Following Multiplier Model

question 12

Essay

Consider the following multiplier model:
AE = 5,000 + 0.9Y,and potential output equals 45,000.
(1)Calculate equilibrium output.
(2)State what fiscal policy you would recommend to eliminate the inflationary or recessionary gap.
(3)Calculate the change in government spending needed to eliminate the gap.

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Definitions:

Revenue

The total income generated from normal business operations, such as sales of goods or services, before any expenses are deducted.

Firm Increases Price

A strategic decision by a company to raise the selling prices of its products or services, possibly due to increased costs or in response to high demand.

Rational

Referring to thinking or decision-making that is based on logic or reason rather than emotions.

Optimizing

The process of making something as effective, functional, or profitable as possible.