An economy is initially described by the following equations: C = 60 + 0.8(Y–T) I = 120–5r MIP = Y-25r G = 200 T= 200 M = 3000 P= 3 b. Suppose that a newly elected president cuts taxes by 25 percent. Assuming the money supply is held constant, what are the new equilibrium interest rate and level of income? What is the tax multiplier? new equilibrium r. new equilibrium Y: tax multiplier:

An economy is initially described by the following equations: C = 60 + 0.8(Y–T) I = 120–5r MIP = Y-25r G = 200 T= 200 M = 3000 P= 3 b. Suppose that a newly elected president cuts taxes by 25 percent. Assuming the money supply is held constant, what are the new equilibrium interest rate and level of income? What is the tax multiplier? new equilibrium r. new equilibrium Y: tax multiplier:

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter15: Fiscal Policy

Section: Chapter Questions

Problem 8SQ

See similar textbooks

Similar questions

The formula for the tax multiplier is: -MPS/MPC. MPS/MPC. -MPC/MPS. -1/MPS. A government policy action that moves the economy closer to full employment or potential output is called: an aggregate supply policy. an expansionary policy. a stabilization policy. a contractionary policy. All else constant, if the GDP in an economy decreases then: demand for money increases. demand for money decreases. the quantity demanded for money increases. the quantity demanded for money decreases. If the marginal propensity to consume is 0.8, the value of the multiplier is: 5. 1.25. 2. 0.8.
Assume that the consumption function is given by C = 200 + 0.5(Y – T) and the investment function is I = 1,000 – 200r, where r is measured in percent, G equals 300, and T equals 200.Assume that the equilibrium in the money market may be described as M/P = 0.5Y – 100r, and M/P equals 800. Calculate the equilibrium r and Y. Calculate the government spending multiplier.
Consider an economy described by the following equations. Y=C+I+G C=100+.75(Y−T) I=500−50r G=125 T=100 Where: Y is GDP, C is consumption, I is investment, G is government spending, T is taxes and r is the rate of interest. Question: 1. Assuming that no change in fiscal policy, what is the effect of a reduction in interest rate from 4 percent to 3 percent on equilibrium output? 2. Suppose the Central Bank policy is to adjust the money supply to maintain the interest rate at 4 percent, so r=4. What is the value of output?
There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct? A) By themselves, both the change in the output and the change in the interest rate decrease desired investment. B) By themselves, both the change in output and the change in the interest rate increase desired investment. C) By itself, the change in the output decreases desired investment spending and by itself the change in the interest rate increases desired investment spending. D) BY itself, the change in output increases desired investment spending and by itself the change in the interest rate decreases desired investment spending.
Assuming that the money demand function depends on income, the interest rate and the price level as presented in class, then if planned investment decreases as the interest rate increases, the size of the government spending multiplier for expansionary fiscal policy will be________ than it was when we ignored the money market. a)exactly the same b)larger c)smaller
Consumption function C=250+0.6(Y-T) Investment I=100-20r Money demand function (M/P)=Y-20r a. Government purchases and taxes are both 100. In the accompanying diagram, graph the IS curve for r ranging from 0 to 8 by dragging and dropping the end points to the correct locations. b. The money supply M is 2,875 and the price level P is 5. In the accompanying diagram, graph the LM curve for r ranging from 0 to 8 by dragging and dropping the end points to the correct locations. c. Find the equilibrium interest rate, r, and the equilibrium level of income Y.
The following parameters describe the structure of a hypothetical economy: Autonomous consumption=240 Autonomous investment=1000 Autonomous taxes=100 Autonomous government expenditure=400 Real money supply (M/P)=600 Tax rate=0.25 Marginal propensity to consume=0.8 Interest elasticity of investment=50 Interest elasticity of demand for money=62.5 Income elasticity of demand for money=0.25 a) Determine and explain the relative effectiveness of fiscal and monetary policies and State the values of the fiscal and monetary policy multipliers if the economy is in a liquidity trap. Explain. b) Use your answer in part a) above to determine equilibrium income and interest rate. c) If government expenditure is increased by 150 units, show how equilibrium interest rate and equilibrium income will change. Can you determine the extent to which investment is crowded out as a result? Explain.
answer c and d Suppose that the following system of equations describe the macroeconomy of a hypothetical country: Y= C(y)+I(i)+G : IS or goods market M/p=L(i,y) : LM or money market b) Taking money supply and government expenditure as exogenous and the price level as fixed, determine and provide economic intuition for the signs and magnitudes of the following multipliers dY/dG and di/dG c) For a simultaneous increase in both the interest elasticity of investment and interest elasticity demand for money parameters, determine the net effect on the values of the multipliers in part b). d) For a horizontal LM curve, determine the numerical values of your answers in part b) above if: Marginal propensity to consume=5/6 Tax rate=0.25 Interest elasticity of investment=5 Interest elasticity of demand for money=50 Income elasticity of demand for money=2 answer c and d only
Use AD and AS curves to explain the effects on the equilibrium price level and equilibrium level of output in the short run.(a) An expansionary fiscal policy with the economy operating near full capacity. (b) A contractionary monetary policy during a period of high unemployment and excess industrial capacity. (c) A strong hurricane destroys energy plants which cause energy prices to increase, assuming that the Fed attempts to keep interest rates constant by accommodating inflation. (d) The federal government pursues a contractionary fiscal policy while the Fed acts to keep output from falling.
The federal government implements an expansionary fiscal policy of increased spending and decreased taxes. Policy advisors predict output will increase 4% but are surprised when only 3% growth occurs. What might account for the fact that GDP increased by less than the multiplier predicted? a. Policy advisors' calculation of MPS was too high b. The aggregate supply curve was perfectly elastic c. Foreign purchases of domestic goods was greater than expected due to a devalued currency d. Consumption increases more than expected because of the decrease in taxes e. Investment decreased due to rising interest rates
If a wealthy person writes a check to purchase a new car, he is employing money as _______. a. a measure of exchange. b. a store of value. c. a measure of value. The tax multiplier is: a. -0.8 b. -1.25 c. -5 d. -4 If current real GDP is P700 billion, which of the following policies would bring the economy to potential output? a. decrease taxes by P100 billion b. increase taxes by P100 billion c. decrease taxes by P25 billion d. increase taxes by P25 billion * the attached photo is connected to the questions *
Use an open-economy ISLM framework to graph and explain the overall effect of expansionary fiscal policy on y and r in an economy characterized by a relatively interest-sensitive money demand function. Also consider the impact of this policy on the distribution of output among spending sectors.