Consider the economy described by the following equations C

Consider the economy described by the following equations:

C

= 2,000 + 0.75 (Y – T)

I ^p

= 900

G

= 2,000

NX

= 200

T

= 2,000

Y*

= 15,000

a. Complete the table shown below to find short-run equilibrium output. Consider possible values for short-run equilibrium output as they are given in the table below.

Instruction: If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers.

b. Short-run level of equilibrium output: ____.

c. What is the output gap for this economy?

Instructions: If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. The actual unemployment rate should be rounded to two decimal places.
      

Output gap: ______where Y* = 15,000.

If the natural rate of unemployment is 5 percent, what is the actual unemployment rate for this economy (use Okun’s law given Y* = 15,000).

Actual unemployment rate: ____%.

Solution

Planned aggregate expenditure=C+I_P+G+NX

PAE=2000+0.75(Y-T)+900+2000+200 ;PUT T=2000

PAE=2000+0.75(Y-2000)+900+2000+200 = 5100-1500+0.75Y

PAE=3600+0.75Y

Put all y values from table in PAE

For short run equilibrium,y=PAE

It happens at y=14400 (short run equilbrium output)

Output gap=actual output-potential output =Y-Y*

                  =14400-15000= -600

                Formula of okun\'s law:

Percentage change in output=2( actual unemployment rate-natural unemployment rate)

[(Y*-Y)/Y*](100)=2(actual unemployment rate-5)

[(15000-14400)/15000](100)=2actual rate-10

4+10=2actual rate

actual rate=7%