Imagine an economy in which consumer expenditure is represented by the following equation:

C = 50 + 0.75DI

Imagine also those investors want to spend $500 at every level of income (I = $500), net exports are 0 (X – IM = 0), government purchases are $300, and taxes are $200.

a. What is the equilibrium level of GDP?

b. If potential GDP is $3,000, is there a recessionary or inflationary gap? If so, how much?

c. What will happen to the equilibrium level of GDP if investors become optimistic about the country’s future and raise their investment to $600?

d. After investment has increased to $600, is there a recessionary or inflationary gap? How much?