Aggregate Expenditure with Government (Fiscal Policy) Consider the following macroeconomic model under "slack" conditions (i.e. price level held fixed): Y =C +I+G C= 200 + .8Yd Yd = Y-TX + TR TX = 150 + .25Y TR = 50 I= 400 G= 400 where Y = real income, C = real consumption, I= real investment, G = real government expenditures, Yd = real disposable income, TX = real tax revenues, and TR = real transfer payments. Calculate the equilibrium level of real income (output). At this equilibrium level of income, is there a govt. budget surplus or deficit? Of how much? Calculate the effect on real income of a decline in autonomous taxes of 100. Explain your answer. Now suppose that the economy is at the original level of equilibrium income (prior to the autonomous tax increase). Also suppose that the government wishes to raise equilibrium output by $500, by changing government spending. By how much must government spending be increased or decreased to achieve this goal? What is the impact on the government budget? Suppose instead that the government wants to achieve this goal of raising output by $500 by changing the autonomous lump sum tax, keeping govt. spending fixed at $400. What is the change in taxes necessary to bring about this change in equilibrium output? What is the impact on the govt. budget? Finally, suppose that the government wants to raise equilibrium output by $500 but without changing the budget deficit or surplus. Which fiscal policy will achieve this goal? [Here, for the original economy, assume that there is no marginal tax rate (i.e., 1= 0), and that there are no transfer payments either (i.e., TR = 0).]
Aggregate Expenditure with Government (Fiscal Policy) Consider the following macroeconomic model under "slack" conditions (i.e. price level held fixed): Y =C +I+G C= 200 + .8Yd Yd = Y-TX + TR TX = 150 + .25Y TR = 50 I= 400 G= 400 where Y = real income, C = real consumption, I= real investment, G = real government expenditures, Yd = real disposable income, TX = real tax revenues, and TR = real transfer payments. Calculate the equilibrium level of real income (output). At this equilibrium level of income, is there a govt. budget surplus or deficit? Of how much? Calculate the effect on real income of a decline in autonomous taxes of 100. Explain your answer. Now suppose that the economy is at the original level of equilibrium income (prior to the autonomous tax increase). Also suppose that the government wishes to raise equilibrium output by $500, by changing government spending. By how much must government spending be increased or decreased to achieve this goal? What is the impact on the government budget? Suppose instead that the government wants to achieve this goal of raising output by $500 by changing the autonomous lump sum tax, keeping govt. spending fixed at $400. What is the change in taxes necessary to bring about this change in equilibrium output? What is the impact on the govt. budget? Finally, suppose that the government wants to raise equilibrium output by $500 but without changing the budget deficit or surplus. Which fiscal policy will achieve this goal? [Here, for the original economy, assume that there is no marginal tax rate (i.e., 1= 0), and that there are no transfer payments either (i.e., TR = 0).]
Chapter11: Fiscal Policy
Section: Chapter Questions
Problem 1.8P
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Please answer the part d , e ,f....
![3)
Aggregate Expenditure with Government (Fiscal Policy)
Consider the following macroeconomic model under "slack" conditions (i.e. price
level held fixed):
Y =C+I+G
C= 200 + .8Yd
Yd = Y - TX + TR
TX = 150 + .25Y
TR = 50
I= 400
G= 400
where Y = real income, C = real consumption, I = real investment, G = real
government expenditures, Yd = real disposable income, TX = real tax revenues,
and TR = real transfer payments.
(a)
Calculate the equilibrium level of real income (output).
(b)
At this equilibrium level of income, is there a govt. budget surplus or deficit? Of
how much?
(c)
Calculate the effect on real income of a decline in autonomous taxes of 100.
Explain your answer.
Now suppose that the economy is at the original level of equilibrium income
(prior to the autonomous tax increase). Also suppose that the government wishes
to raise equilibrium output by $500, by changing government spending. By how
much must government spending be increased or decreased to achieve this goal?
What is the impact on the government budget?
(d)
Suppose instead that the government wants to achieve this goal of raising output
by $500 by changing the autonomous lump sum tax, keeping govt. spending fixed
at $400. What is the change in taxes necessary to bring about this change in
equilibrium output? What is the impact on the govt. budget?
(e)
Finally, suppose that the government wants to raise equilibrium output by $500
but without changing the budget deficit or surplus. Which fiscal policy will
achieve this goal?
[Here, for the original economy, assume that there is no marginal tax rate (i.e., 1=
0), and that there are no transfer payments either (i.e., TR = 0).]
(f)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd96911c0-14f6-4c69-bcd4-ae73aa3a6a8f%2F141ab4fd-fe5a-45e1-ac23-600881d409c4%2F2vpfctn_processed.jpeg&w=3840&q=75)
Transcribed Image Text:3)
Aggregate Expenditure with Government (Fiscal Policy)
Consider the following macroeconomic model under "slack" conditions (i.e. price
level held fixed):
Y =C+I+G
C= 200 + .8Yd
Yd = Y - TX + TR
TX = 150 + .25Y
TR = 50
I= 400
G= 400
where Y = real income, C = real consumption, I = real investment, G = real
government expenditures, Yd = real disposable income, TX = real tax revenues,
and TR = real transfer payments.
(a)
Calculate the equilibrium level of real income (output).
(b)
At this equilibrium level of income, is there a govt. budget surplus or deficit? Of
how much?
(c)
Calculate the effect on real income of a decline in autonomous taxes of 100.
Explain your answer.
Now suppose that the economy is at the original level of equilibrium income
(prior to the autonomous tax increase). Also suppose that the government wishes
to raise equilibrium output by $500, by changing government spending. By how
much must government spending be increased or decreased to achieve this goal?
What is the impact on the government budget?
(d)
Suppose instead that the government wants to achieve this goal of raising output
by $500 by changing the autonomous lump sum tax, keeping govt. spending fixed
at $400. What is the change in taxes necessary to bring about this change in
equilibrium output? What is the impact on the govt. budget?
(e)
Finally, suppose that the government wants to raise equilibrium output by $500
but without changing the budget deficit or surplus. Which fiscal policy will
achieve this goal?
[Here, for the original economy, assume that there is no marginal tax rate (i.e., 1=
0), and that there are no transfer payments either (i.e., TR = 0).]
(f)
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