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1. Suppose that the economy can be described by the following equations: C = 400 + (8/9)*DI I= 300 G= 800 T=(1/2)*Y (X – M) = 0. a. If national income (Y) increased by $1, by how much would consumption increase? What is the name of this concept? b. Find the equilibrium level of output. c. The budget for this fiscal year increases government spending by $50. i) Sketch the effect of the increase in government spending. ii) Calculate the new equilibrium level of income. iii) Calculate the change in income and compare to the increase in government spending. Comment. iv) Given your numerical answer in part (iii), calculate the change in national income when government spending increases by one dollar. v) Derive the actual value of the fiscal multiplier using an algebraic equation. Compare to part (iv). Now G assumes its original value of G = 800. d. Congress decreases the tax rate from (1/2) to (1/4) i) Sketch the effect of the decrease in the tax rate. ii) Calculate the new equilibrium level of income. e. Suppose that voters care more about reducing unemployment than the level of the federal deficit. If you were running for Congress this year (and you wanted to win the election), would you promise to increase or to decrease government spending? Explain your answer.

1. Suppose that the economy can be described by the following equations: C = 400 + (8/9)*DI I= 300 G= 800 T=(1/2)*Y (X – M) = 0. a. If national income (Y) increased by $1, by how much would consumption increase? What is the name of this concept? b. Find the equilibrium level of output. c. The budget for this fiscal year increases government spending by $50. i) Sketch the effect of the increase in government spending. ii) Calculate the new equilibrium level of income. iii) Calculate the change in income and compare to the increase in government spending. Comment. iv) Given your numerical answer in part (iii), calculate the change in national income when government spending increases by one dollar. v) Derive the actual value of the fiscal multiplier using an algebraic equation. Compare to part (iv). Now G assumes its original value of G = 800. d. Congress decreases the tax rate from (1/2) to (1/4) i) Sketch the effect of the decrease in the tax rate. ii) Calculate the new equilibrium level of income. e. Suppose that voters care more about reducing unemployment than the level of the federal deficit. If you were running for Congress this year (and you wanted to win the election), would you promise to increase or to decrease government spending? Explain your answer.

MACROECONOMICS
MACROECONOMICS
14th Edition
ISBN:9781337794985
Author:Baumol
Publisher:Baumol
Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?
Section9.A: The Simple Algebra Of Income Determination And The Multiplier
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Pg.l Econ Hw # 4 4//22 |. Given Quantity Prnduced Cin millions of bushels) ovanges Apples 2026 \2021 30 18 33 21 Given Prices of apples and evanges per bushel in bruitapia bishel] oranges prices (im dollars per bruitopia Apples 2 2020 2021 3 a) calculate nominal GDP in 2020 ond 2021 nominal 6DP 2020 (30-2) + (18-4) = 60+72=132 6132 million nominal 6D P 2021 33.3) +21•5)= 99 + lo s = $204 million =/204 b) calculate real GDP in 2020 + 2021 o 2020 is base year *1)since 2020 is base year prices are fixed at 2020 prices real GOP 2020 →(30.2) +(18.4) = 60+72 = 132 $ 132 million (33.2) +(21•4) = 66+84=150 freal GOP 2021 +$150 million %3D Olind Percentane Growth ot hominal r real GOP from 20202021 204-132 W Formula' Ain nominal GOP buse year 6DP 72 • 100 → 132 nominat 166 • \00 132 percentage Growth of nominal GOP from 2020 →2021 + 54.54% 64.54% Same for real GDP just use Ain real GDP 150-132 18. • 100 100 13.63% 132 132 Percentage orowth of real 6DP from 2020. 13.63% 2021
Transcribed Image Text:Pg.l Econ Hw # 4 4//22 |. Given Quantity Prnduced Cin millions of bushels) ovanges Apples 2026 \2021 30 18 33 21 Given Prices of apples and evanges per bushel in bruitapia bishel] oranges prices (im dollars per bruitopia Apples 2 2020 2021 3 a) calculate nominal GDP in 2020 ond 2021 nominal 6DP 2020 (30-2) + (18-4) = 60+72=132 6132 million nominal 6D P 2021 33.3) +21•5)= 99 + lo s = $204 million =/204 b) calculate real GDP in 2020 + 2021 o 2020 is base year *1)since 2020 is base year prices are fixed at 2020 prices real GOP 2020 →(30.2) +(18.4) = 60+72 = 132 $ 132 million (33.2) +(21•4) = 66+84=150 freal GOP 2021 +$150 million %3D Olind Percentane Growth ot hominal r real GOP from 20202021 204-132 W Formula' Ain nominal GOP buse year 6DP 72 • 100 → 132 nominat 166 • \00 132 percentage Growth of nominal GOP from 2020 →2021 + 54.54% 64.54% Same for real GDP just use Ain real GDP 150-132 18. • 100 100 13.63% 132 132 Percentage orowth of real 6DP from 2020. 13.63% 2021
1. Suppose that the economy can be described by the following equations: C= 400 + (8/9)*DI I= 300 G= 800 T=(1/2)*Y (X -М) 3 0. a. If national income (Y) increased by $1, by how much would consumption increase? What is the name of this concept? b. Find the equilibrium level of output. c. The budget for this fiscal year increases government spending by $50. i) Sketch the effect of the increase in government spending. ii) Calculate the new equilibrium level of income. iii) Calculate the change in income and compare to the increase in government spending. Comment. iv) Given your numerical answer in part (iii), calculate the change in national income when government spending increases by one dollar. v) Derive the actual value of the fiscal multiplier using an algebraic equation. Compare to part (iv). Now G assumes its original value of G = 800. d. Congress decreases the tax rate from (1/2) to (1/4) i) Sketch the effect of the decrease in the tax rate. ii) Calculate the new equilibrium level of income. e. Suppose that voters care more about reducing unemployment than the level of the federal deficit. If you were running for Congress this year (and you wanted to win the election), would you promise to increase or to decrease government spending? Explain your answer.
Transcribed Image Text:1. Suppose that the economy can be described by the following equations: C= 400 + (8/9)*DI I= 300 G= 800 T=(1/2)*Y (X -М) 3 0. a. If national income (Y) increased by $1, by how much would consumption increase? What is the name of this concept? b. Find the equilibrium level of output. c. The budget for this fiscal year increases government spending by $50. i) Sketch the effect of the increase in government spending. ii) Calculate the new equilibrium level of income. iii) Calculate the change in income and compare to the increase in government spending. Comment. iv) Given your numerical answer in part (iii), calculate the change in national income when government spending increases by one dollar. v) Derive the actual value of the fiscal multiplier using an algebraic equation. Compare to part (iv). Now G assumes its original value of G = 800. d. Congress decreases the tax rate from (1/2) to (1/4) i) Sketch the effect of the decrease in the tax rate. ii) Calculate the new equilibrium level of income. e. Suppose that voters care more about reducing unemployment than the level of the federal deficit. If you were running for Congress this year (and you wanted to win the election), would you promise to increase or to decrease government spending? Explain your answer.
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