1. The data below belong to a hypothetical private, closed economy. All numbers are in billion dollars. Answer the following questions:
Real Domestic Output Consumption Investment
200 220 20
250 260 20
300 300 20
350 340 20
400 380 20
450 420 20
500 460 20
a. Determine the equilibrium GDP for this economy. What is the level of aggregate saving at that state? Explain the relationship between the equilibrium level of savings and investment expenditures. (1 point)
b. Assume that the economy opens up to international trade, and achieves net exports of $20 bn. by the end of the ?rst year. What will the new equilibrium GDP be? (Hint: you have to determine the size of the multiplier)
c. Assume, now, that the government decides to push the GDP to the initial equilibrium level because the increase caused by net exports brought about in?ation. Since there are no government expenditures to cut, it has to employ tax policy. By how much does the government need to increase taxes to take the economy back to the initial equilibrium level of GDP? (2 points)
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