The following question relates only to the equilibrium in the goods market IN A CLOSED ECONOMY and asks you to carry out a graphical analysis using both the Keynesian cross diagram together with the IS-MP diagram a) Suppose the goods market is initially in equilibrium. Suppose the government wants to implement a reduction in the overall level of taxation. What is the effect on output, consumption, investment and interest rates of this tax reduction? Explain and illustrate graphically your answer using both the Keynesian cross diagram in combination with the IS-MP diagram.

The following question relates only to the equilibrium in the goods market IN A CLOSED ECONOMY and asks you to carry out a graphical analysis using both the Keynesian cross diagram together with the IS-MP diagram a) Suppose the goods market is initially in equilibrium. Suppose the government wants to implement a reduction in the overall level of taxation. What is the effect on output, consumption, investment and interest rates of this tax reduction? Explain and illustrate graphically your answer using both the Keynesian cross diagram in combination with the IS-MP diagram.

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter15: Fiscal Policy

Section: Chapter Questions

Problem 6SQ

See similar textbooks

Similar questions

The following question relates only to the equilibrium in the goods market IN A CLOSED ECONOMY and asks you to carry out a graphical analysis using both the Keynesian cross diagram together with the IS-MP diagram. >>) Suppose after the government has implemented the reduction in taxation that the central bank wants to keep the level of investment at the same level as before the tax reduction. How can the central bank intervene in the market to achieve this goal? Explain and illustrate graphically how the central bank can keep investment at the same level as before. Is there any additional impact of the central bank intervention on output, consumption and interest rates? If so what is the impact?
Consider the following income/expenditure diagram in the simple Keynesian model. If taxes, T, were increased, then Group of answer choices A) The Y = C+S+T line would shift to the right, and equilibrium Y would increase. B) the C+I+G line would shift downward, and equilibrium Y would decrease. C) The Y = C+S+T line would shift to the left, and equilibrium Y would decrease. D) neither of the lines would shift, and equilibrium Y would stay the same. E) the C+I+G line would shift upward, and equilibrium Y would increase.
You are provided with the following information about an imaginary economy called Keynesia: Government expenditure 400 Exports 250 Autonomous imports 50 Autonomous consumption 150 Investment expenditure 300 Full- employment output 1900 Marginal propensity to consume 0.75 Marginal propensity to import 0.15 Tax rate 0.25 Required (I) Derive the IS equation (ii) Derive the savings function (iii) Calculate the equilibrium level of income using the aggregate expenditure approach. (iv) What would the value of income be if the trade balance is zero? (v) What would the value of income be if autonomous consumption increases by 50
If the simple Keynesian macroeconomic model is used to explain expansionary fiscal policy, which of the following can be concluded with regard to macroeconomic equilibrium? a) That firms experience an unplanned increase in their inventories. b) The economy will move towards equilibrium. c) Inventory levels will rise above the equilibrium level. d) The effect on equilibrium cannot be determined given the information given
An open economy presents the following data. The intercept of the consumption function is 4700.The marginal propensity to save (MPS) is 0.20.There are no tax collections in this economy.Government expenditure is 10,000.Autonomous investment is 6,000.The marginal propensity to invest is 0.12.Autonomous exports are 5,000.Autonomous imports are 3,000.The marginal propensity to import is 0.1.Using this information, answer the following four parts. Calculate the equilibrium level of GDP.Calculate the multiplier in this economy.Now suppose that the MPS changes to 0.15. Calculate the new multiplier in this economy.Given the change in the MPS to 0.15, calculate the new equilibrium level of GDP
Please answer all the three An increase in investment spending because companies become more optimistic about investment profitability causes the aggregate demand function to shift up, the equilibrium level of aggregate output to__________ and the IS curve to shift to the__________ everything else held constant. A) fall; right B) rise; left C) fall; left D) rise: right Which of the following statements concerning IS-MP analysis is true? A) Changes in net exports arising from a change in interest rates causes a shift in the IS curve. B) Expansionary fiscal policy will cause the interest rate to fall. C) A fall in the money supply shifts the LM curve to the right. D) For a given change in taxes, the IS curve will shift less than for an equal change in government spending. LVTS participants with positive settlement balances at the end of the day.________ A) are paid the overnight rate B) are paid the bank rate less 50 basis points C) are paid the prime rate D) are paid the bank rate
Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy.
Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical…
Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output.
Suppose we have the following information for the simple (fixed r, fixed P, fixed W) Keynesian model. C = 400 + 0.8 I = 310 G = 140 = 400 + 0.8 (Y - T) T = 200, where C is the consumption function, (Y - T) is disposable income, I is investment, G is government spending, and T is taxes If (disposable income) increased by $200, C would Group of answer choices A) increase by $160. B) increase by $150. C) increase by $135. D) decrease by $40. E) increase by $200.
In the Keynesian model, an introduction of a proportional tax will: (a) increase the slope of the consumption function.(b) reduce the multiplier.(c) increase the equilibrium level of income.(d) increase the multiplier.. A decrease in the price level will: (a) shift the AS curve to the left.(b) shift the AD curve to the left.(c) shift the AS curve to the right.(d) leave both the AD curve and the AS curve unchanged.
Assuming that there is no government spending or trade, an economy’s GDP is the sum of domestic consumption C and investment I, i.e. Y = C+ I Assume that I is unaffected by GDP Assume the consumption function is C = c0 + c1Y In any equilibrium aggregate demand, AD must be equal to Y, GDP. Given this model, which FIVE of the following statements are correct? Select one or more: A. If the economy above is a demand-driven economy, then the equilibrium solution for Y is given by Y = m(c0 + I), where m = 1/(1 - c1) is the multiplier. B. if c1 = 0.8 the multiplier is equal to 1/0.8= 1.25 C. if c1 = 0.75 the multiplier is equal to 4 D. assume c0 =100, I=50, c1=0.6. The equilibrium value of Y in a demand-driven economy is 300. E. Assume that Y is initially 400, I is initially 100, and the multiplier is 2.5. I increases by 10%. The multiplier implies that in equilibrium Y will increase by 25%. F. The higher is c1 the larger is the multiplier G. If consumers…