Consider the ɔl owing information for a closed economy Consumption 400 +0.6(Y-T) Taxes 500 Investment S ending 750 Government Eixpenditures 350
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- Exercise D24 Compare two policies: a tax cut on income or an increase in government spending on roads and bridges. What are both the short-term and long—term impacts of such policies on the economy?Given thatG= 201= 35C = 0.9Ya + 70T= 0.2Y + 25Where, G, I, C, T and Ya are planned government expenditure and planned investment autonomous andconsumption expenditure and tax respectively.Calculate the equilibrium level of national income.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?
- Suppose that due ot a fiscal stimulus, there is an increase in disposable incomes of $100 billion in the first round. Then, $33 billion was spent in consumption from this initial change of the disposable incomes. Following the same marginal propensity to consume, how much is the change in consumption spending in the next round from the $33 billion?Suppose that the marginal propensity to consume is dC/dy= 0.4 + (1 / sq. root of 3y + 10)(in billions of dollars) and that consumption is $9 billion when disposable income is $0. Find the nationalconsumption function C. Round numbers in your answer to two decimal places when appropriate.If the marginal propensity to consume is 0.75, byhow much would government spending have to rise toincrease output by $1,000 billion? By how muchwould taxes need to decrease to increase output by$1,000 billion?
- Give typed solution only assume an economy has an MPC of .5 and their full employment level of output is $500 billion. If their current GDP is $600 billion, what could their government do to try ans correct this? a) decrease taxes by $50 billion b) decrease government spending by $50 billion c) increase government spending by $50 billion d) increase taxes by $50 billionNo 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 measureOnly typed answer Explain why the multiplier falls when taxes depend on income. .1 Assume the following for the economy of a country: a. Consumption function: C = 60 + 0.75Yd b. Investment: I = 75 c. Government spending: G = 45 d. Net taxes: T = - 25 + 0.2Y e. Disposable income: Yd. = Y - T f. Equilibrium: Y = C + I + G Solve for equilibrium income. How much does the government collect in net taxes when the economy is in equilibrium? What is the government’s budget deficit or surplus?
- Assume: Y= C + I + G + NX C = 400 + (0.8)YD Io = 200 G = 300 + (0.1)(Y* - Y) YD = Y - TA + TR NXo = - 40 TA = (0.25)Y TRo = 50 From the model above you can see that government purchases (G) are counter-cyclical, that is, G is increased as national income decreases. If you compare this specification of G with one that has a constant level of government spending (for example, Go = 300), how would the value of the expenditure multiplier differ?Suppose an economy with the following characteristics.Y = Real GDP or national incomeT = Taxes = 0.3YC = Consumption = 140 + 0.9(Y – T)I = Investment = 400G = Government spending = 800X = Exports = 600M = Imports = 0.15YGiven the information above, What is this economy’s spending multiplier?15. If consumers in a country spend 3/4 of their disposable income. If their governmentincreases its spending by 75 trillion and in order to maintain a balanced budgetsimultaneously increases taxes by 75 trillion. Calculate the effect of the 75 trillion change ingovernment spending and 75 trillion change in taxes on the country’s aggregate demand.
