2. Consider a Keynesian model of the economy with the followingequations:
C = 300 + 0.7Yd
Transfer payments = 500
T = 0.1Y
I = 300
G = 400
X = 150
M = 0.2Y
(a) Calculate the equilibrium income level.
(b) Government spending on goods and services increases by 50.Calculate the new equilibrium level of income. (1 mark)
(c) If potential GDP is 2,750 what is the size of the output gapbetween potential and actual GDP (derived from (a) above)? How muchshould public spending have been increased by in order to havefully closed the output gap?
(d) In the short-run Keynesian model of income determinationwhat is the cause of the output gap, and what are the possiblemacro solutions?
