Assume we have an economy where the Price Level is constant. We can describe that economy with the following equations (below).
|C = 0.8(DI) + 2000||C = Consumption Expenditure, DI = Disposable Income|
|I = 1000||I = Investment Expenditure|
|G = 1200||G = Government Expenditure|
|X = 500||X = Expenditure on Exports|
|M = 500||M = Expenditure on Imports|
|T = 1000||T = Tax Revenue|
|DI = Y - T|
Assume that Potential GDP is 5000 more than the equilibrium GDP in this economy.
a. By how much should the government of this economy change government expenditure to close this output gap?
b. By how much should the government of this economy change taxes to close this output gap?