# 2) It is the year 2112. The Solar Federation has recently established its first interstellar colony on theplanet Centauri. The planet has the atmosphere and resources to support life they just need labor toproduce output and money (called the “Cent," after Centauri) to keep track of transactions. Thingswere rolling along nicely until the newly clected Chancellor of the Solar Federation signed legislationdeclaring the Centauri currency void as legal tender and shutting down all investment activity onCentauri. Thus was an enormous chunk of Centauri citizens' wealth vaporized.You have been hired by the Centauri government to help resolve the resulting planet-wide depression.Good thing you'll take an IOU.The following table describes the current state of the Centauri economy:Aggregate SupplyPrice LevelAggregate DemandPrice levelrGDPrGDP115620100660120640110650125660120640130680130630140700140620150712150610722160160600170730170590Youmay find thre "Eentmeri 212"Exoel filewefut in your efforts-The Al that runs your actuarial department has calculated that, at any price level, Centauri's aggregatedemand has the equation AD = 0.75(Y – T) + G, where Y is real GDP, T is total taxes, I is investment andG is government spending. Everything is measured in billions of 2099 Cents (denoted C). Thegovernment reports that taxes are T = 60 and government expenditures are G = 205.By how much will a 10-Cent decrease in taxes T increase Aggregate Demand?a)b) By how much will a 10-Cent increase in government spending G increase Aggregate Demand?.Which policy is a more effective way to change Aggregate Demand?c)d)Determine a policy that will return the Centauri economy to its long-run equilibrium. That is,figure out a combination of changes to taxes and government spending that gets AD back to 700.For now, ignore what will happen to the price level.

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Step 1

*Solving only parts a and b as mentioned.

Initial equilibrium is where aggregate demand (AD) is equal to aggregate supply (AS) - Y.

Y = 0.75 (Y-T) +G

Now, for T = 60 cents and G = 205 cents

Y = 0.75(Y-60) + 205

Y = 640

a) Now, if there is a change in taxes that is ta...

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