1. Consider a two-period economy with lump-sum taxes. Suppose the ment announces a tax cut of 10 in period 1 holding government spending constant in periods 1 and 2. (i.e., AT assuming no debt inherited from period 0, i.e., Bo 10 percent govern ΔG, 0.) We are -10, AG1 0. Suppose the interest rate is (a) Calculate the change in taxes in period 2, AT2. (b) Calculate the change in the primary and secondary fiscal deficits in ре- riod 1 (c) Calculate the change in the primary and secondary fiscal deficits in pe- riod 2

1. Consider a two-period economy with lump-sum taxes. Suppose the ment announces a tax cut of 10 in period 1 holding government spending constant in periods 1 and 2. (i.e., AT assuming no debt inherited from period 0, i.e., Bo 10 percent govern ΔG, 0.) We are -10, AG1 0. Suppose the interest rate is (a) Calculate the change in taxes in period 2, AT2. (b) Calculate the change in the primary and secondary fiscal deficits in ре- riod 1 (c) Calculate the change in the primary and secondary fiscal deficits in pe- riod 2

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.4P

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Suppose the federal government gives taxpayers a tax cut financed by borrowing. If taxpayers their debts, total spending will: O decrease. O first increase and then decrease. O increase. O remain unchanged.
(a) Assume that Gross Domestic Product (GDP)/Total output (Y) is 6,000. Consumption (C) is given by the equation C = 600 + 0.6(Y – T) where T is the tax. Investment (I) is given by the equation I = 2,000 – 100r, where r is the real rate of interest, in percent. Taxes (T) are 500, and government spending (G) is also 500. What are the equilibrium values of C, I, and r?
No written by hand solution a) Use the AS-AD model to describe the crowding-out effect of private investment occurring when the government decides to decrease taxation (T). Your analysis should include the AS-AD, IS-LM, and the money market graph. b) Assume that the government asked you to estimate how the above reduction in taxes will affect the income/GDP in the economy. How would you answer? (Hint: Mention and discuss not only graphs, but also the formula of the multiplier, and whether the multiplier is an accurate measure
Suppose a closed economy with no government spending which in equilibrium is producing an output and income of 2500. Suppose also that the marginal propensity to consume is 0.80, and that, if at full employment, the economy would produce an output and income of 3900 By how much would the government need to cut taxes (T) to bring the economy to full employment?
(a) Assume Consumption (C) is given by the equation C = 500 + 0.6(Y – T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 – 100r, where r = the real interest rate = 13 percent. In this case, what is the equilibrium Gross Domestic Product (GDP)/Total output (Y)/Total income? How does the equilibrium income change if government designs and executes expansionary fiscal policy? Show graphically and mathematically.
A4 Consider a linear income tax system in which one’s tax owed to government, T, depends on one’s income, I, according to the formula T = a + tI, where 0 < t < 1, and a is a constant. (a) What is the marginal tax rate (MTR)? Does the MTR change with income? (b) What is the average tax rate (ATR) when the income level is I? (c) If the income tax is progressive, then what can you say about the value of a?
a) Suppose that there are no crowding-out effects and the MPC is 0.8. By how much must the government increase expenditures shift the aggregate-demand curve right $10 billion? b. The model of Long-run Growth, proposes that fiscal policy can have lasting effects on savings, investment, and economic growth. On the other hand, the model of Aggregate Demand-Aggregate Supply suggests that the only long run effect of fiscal policy is an increase in the price level. How could you use the Aggregate Demand and Aggregate Supply model for a more accurate description of the short-run and long-run effects of an increase in government spending? Could you distinguish between different uses of government expenditures to predict their effects on prices and output?
2. Suppose the economy is in recession. Policymakers estimate that aggregate demand is$100 billion short of the amount necessary to generate the long run natural rate of output.That is, if aggregate demand were shifted to the right by $100 billion, the economy would be inlong run equilibrium.a. Explain the impact on the economy if the government chooses to use fiscal policy to stabilizethe economy and the marginal propensity to consume (MPC) is given as 0.75 with no crowdingout.b. If there is a crowding out effect and investment is very sensitive to changes in the interest rate,should the government increase spending more or less than this amount?
16. Suppose that planned investment and planned government purchases do not depend on income:I = 15 and G = 17. Consumption, as you would expect, does depend on income via the consumption function C = 2 + 0.75Y – 0.75T. Net taxes are T = 12. Your friend thinks that the equilibrium will be where Y = 150 but he is wrong. What is the best description of this situation? a. the (Y, AE) point is above the 45 degree line, Y will adjust down b. the (Y, AE) point is above the 45 degree line, Y will adjust up c. the (Y, AE) point is below the 45 degree line, Y will adjust down d. the (Y, AE) point is below the 45 degree line, Y will adjust up 17. (continued) Help you friend by calculating the equilibrium income for the AE model in the previous question. Y = _____
Suppose that the government of Uplandia is experiencing a large budget deficit with fixed government expenditures of G=375 and fixed taxes of T= 225. Assume that consumers of Uplandia behave as described in the following consumption function C = 450 + 0.96 (Y - T). Suppose further that investment spending is fixed at 300. a. Calculate the equilibrium level of GDP in Uplandia. Solve for equilibrium levels of Y, C, and S. b. Next, assume that the National Congress in Uplandia succeeds in reducing taxes by 89 to a new fixed level of 136. Recalculate the equilibrium level of GDP using the tax multiplier c. Solve for equilibrium levels of Y, C, and S after the tax cut and check to ensure that the multiplier worked.
1. If the marginal propensity to consume is 0.8 in an economy, a $20 billion rise in Incomes will do what to GDP? (Tell if it will increase or decrease GDP, and by how much.) 2. Suppose that the level of government spending increased by $100 billion where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by: 3. The Government has a $.8 Trillion Growth target. What fiscal policy should they implement if MPS = .2?
If the government were to try to offset surplus years with deficit years over the business cycle, this would result in O A. a reduction in investment capital. O B. a higher debt-to-GDP ratio. OC. an annually balanced budget. O D. a structurally balanced budget. O E. a cyclically balanced budget.