Figure 3-7
-In figure above, if natural real GDP = $2500, AP = $250, and the change in "a" = change in I = change in NX = 0, the tax cut required to achieve then natural real GDP is

Question

Figure 3-7 
-In figure above, if natural real GDP = $2500, AP = $250, and the change in "a" = change in I = change in NX = 0, the tax cut required to achieve then natural real GDP is

Quizplus · Accepted Answer

From the given information, we know that at natural real GDP, actual GDP is $2500 and AP is $250. Using the formula for actual GDP (Y = C + I + G + NX), we can see that at natural real GDP, the sum of consumption, investment, government spending, and net exports must be equal to $2500. However, since the changes in "a", I, and NX are all equal to zero, any change in GDP must come from a change in consumption or government spending.

We are asked to find the tax cut required to achieve natural real GDP. Since tax cuts are a form of government spending, we can solve for the tax cut required by setting the sum of consumption, investment, government spending (which is equal to tax cuts in this case), and net exports equal to $2500:

$2500 = $250 + $1000 + TC + 0
TC = $1250 - $250 - $1000 = $312.50

Therefore, a tax cut of $312.50 is required to achieve natural real GDP.

Figure 3-7 -In Figure Above, If Natural Real GDP = $2500, AP