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    Economic policy questions

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    1. GDP = Consumption + Investment + Government Expenditures + Net exports
    Or, we can write:
    GDP = T + C + S = C + Ig + G + Xn
    Canceling C from both side, we will get
    T + S = I + G + Xn
    We are given T, I, S, and Xn in this problem. Inserting these values, and rearranging we have
    G = 500+ 400- 400-100 = 400

    The budget balances when G = T. Because T = 500, the budget balance would occur when G also is equal to 500 billion.

    Because the government is spending less than it takes in taxes, it is exerting a negative pressure on investment.

    To increase economic growth, the government needs to cut taxes or increase spending.

    2. An inflationary gap occurs when GDP exceeds potential GDP. When there is an inflationary gap, the economy is producing at levels that are unsustainable. The government can slow economic growth by cutting spending or increasing taxes. Spending increases that occur through automatic stabilizers are those related to unemployment insurance and welfare. These are reduced automatically because fewer people are out of work when the economy is growing too fast. Taxes will be increased automatically if they ...