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how to derive the income multiplier, comsumption multiplier and government multiplier, given Y=C + Io + G
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- Some liken quantitative easing to that of directing a firehose of money to emerging economies that cannot manage the cash, while others worry that the flood of cash has encourages reckless financial behavior. What specific types of "reckless" financial behavior comes from quantitative easing and by whom? Which measure will reduce employment best: government tax reduction, or increased government spending? Can you compare the multiplier effect of a tax reduction versus the multiplier effect of an increase in government spending? There are TWO formulas. Which of the two will have a bigger impact in the economy and why based on the two formulas? Using the formulas, figure this out: If $30 billion in new investment is added to the economy and MPC is 0.9, how much would the national income (GDP) increase by?20. At what level of income are the leakages from the spending stream equal to the injections into the spending stream? a) 4 b) 12 c) 24 d) 8 e) zeroThe government decreases current taxes, while holding government spending in the present and the future constant. Using diagrams, determine the equilibrium effects on consumption, investment, the real interest rate, aggregate output, employment, and the real wage. What is the multiplier, and how does it differ from the government expenditure multiplier? Now suppose that there are credit market imperfections in the market for consumer credit, for example due to asymmetric information in the credit market. Repeat part (a), and explain any differences in your answers in parts (a) and (b)
- Use the following information on economy X to answer the questions below. Consumption function: C = 350 + 0.6Y Investment spending: I = 250 Government spending: G = 400 Exports of goods and services: X = 300 Imports of goods and services: Z = 150 Proportional tax rate: t =25%(Note: Show all calculations and round off to 2 decimal places).Q.4.1.1 Q.4.1.2Q.4.1.4 Q.4.1.5Calculate total autonomous spending for economy X. (3) Calculate the multiplier for economy X. (3)Calculate the budget surplus or deficit at the equilibrium level of income. (3) Calculate the change in equilibrium income if the government decides to (3) increase expenditure to R500.Q.4.1.3Calculate the equilibrium income for the economy. (Hint: Use the multiplier method).(3)Refer to Table 24.6. The value of the government spending multiplier A. is 10. B. is 5. C. is 0.9. D. cannot be determined from the available information.Describe the income multiplier and how does leakage affect it and why?
- Using taxes as a function of income, derive and explain the investment multiplierTRUE/FALSE When talking about tax multipliers using tax rates instead of the more simple lump sum taxes, we argued that the social security tax cut resulted in a higher tax multiplier.Suppose that C = 100+ 0.75(Y -100), I= 50, G = 30, and X- M = 100, all in billions of dollars. What is the simple spending multiplier? What is real GDP demanded? What would happen to real GDP demanded if government purchases increased to $40 billion?
- 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.Which of the following is true? a. All economists agree that the tax multiplier is smaller than the government spending multiplier. b. In the standard Keynesian textbook analysis, the tax multiplier is greater than the government spending multiplier. c. There is disagreement among economists regarding the size of the tax multiplier relative to the size of the government spending multiplier. d. All economists agree that the tax multiplier is greater than the government spending multiplier.The idea that new spending creates more new spending is known as the: a. crowding-out effect. b. multiplier effect. c. wealth effect. d. interest rate effect.