DEMAND SIDE EQUILIBRIUM, INFLATIONARY
VERSUS RECESSIONARY GAP, AND FISCAL STIMULUS VERSUS TAX CUT

In the country of
Utopia, the structure of the economy is described as the following:

Where Y is the level
of real GDP in the economy, DI denotes the disposable income in the economy, C
represents the level of consumption in the economy, C0 is the autonomous
consumption level, mpc denotes the marginal propensity to consume, I is the
level of investment in the economy, I0 characterizes the autonomous investment,
mpi is the marginal propensity to invest, G characterizes the level of
government expenditure, X is the level of export from the country, M represents
the amount of import in the country, M0 is the level of autonomous import, mpm
denotes the marginal propensity to import, T is the amount of tax imposed in
the country, and t represents the average tax rate in the economy.

After extensive
research, the economists in Utopia believe that the following values (all the
dollar values are in number of millions) can be assigned to the structure of
the economy,

C0 = $500; mpc = 0.8;
I0 = $200; mpi = 0.2; G = $400; X = $300; M0 = $100; mpm = 0.1; and t = 0.25.
The Utopian economists further believe that the level of potential GDP in the
country is $4,000.

1.
What is the demand
side equilibrium level of real GDP in the country? Please show your
calculations.

2.
Is the overall Utopian
economy in equilibrium? Elaborate your answer.

3.
If the economy is not
in equilibrium, what will happen eventually? Explain your answer.

4.
What is the value of
the overall multiplier? Please show your calculations and explain the value.

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