MACROECONOMICS FOR TODAY
10th Edition
ISBN: 9781337613057
Author: Tucker
Publisher: CENGAGE L
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Question
Chapter 9, Problem 18SQ
To determine
The impact of the increase in the aggregate expenditure.
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In the economy of Keynesian Island, autonomous consumption expenditure is $50 million, and the marginal propensity to consume is 0.8. Investment is $160 million, government expenditure is $190 million, and net taxes are $250 million. Investment, government purchases, and taxes are constant—they do not vary with income. The island does not trade with the rest of the world.
If the government increases its purchases by $200 million, what will be the change in the economy's equilibrium real GDP? Show the change on the graph as well.
Explain why the multiplier effect of an increase in consumption spending of $100 billion is larger or smaller than the effect of a tax decrease of $100 billion. (Do not just say the spending multiplier is larger or smaller. Explain why.)
1. Suppose the MPC is .90 and the MPI is .10. if government expenditure goes up $100 billion while taxes fall $10 billion, what happen to the equilibrium level of real GDP?
Use following equations for exercise 2-4
C= $100 + .8Y
I=$200
G= $250
X = $100 - .2Y
2. What is the equilibrium level of real GDP?
3. What is the new equilibrium level of real GDP if government spending increases by $150?
4. What is the new equilibrium level of real GDP if government spending and taxes both increase by $150?
5. Make a graph showing the spending and tax revenue of your state government for as many years as you can find (use the government of your home country if you are not from the United States). What trends do you notice? What spending categories make up the largest share of the state budget? What are the largest sources of revenue?
Chapter 9 Solutions
MACROECONOMICS FOR TODAY
Ch. 9.4 - Prob. 1YTECh. 9 - Prob. 1SQPCh. 9 - Prob. 2SQPCh. 9 - Prob. 3SQPCh. 9 - Prob. 4SQPCh. 9 - Prob. 5SQPCh. 9 - Prob. 6SQPCh. 9 - Prob. 7SQPCh. 9 - Prob. 8SQPCh. 9 - Prob. 9SQP
Ch. 9 - Prob. 10SQPCh. 9 - Prob. 1SQCh. 9 - Prob. 2SQCh. 9 - Prob. 3SQCh. 9 - Prob. 4SQCh. 9 - Prob. 5SQCh. 9 - Prob. 6SQCh. 9 - Prob. 7SQCh. 9 - Prob. 8SQCh. 9 - Prob. 9SQCh. 9 - Prob. 10SQCh. 9 - Prob. 11SQCh. 9 - Prob. 12SQCh. 9 - Prob. 13SQCh. 9 - Prob. 14SQCh. 9 - Prob. 15SQCh. 9 - Prob. 16SQCh. 9 - Prob. 17SQCh. 9 - Prob. 18SQCh. 9 - Prob. 19SQCh. 9 - Prob. 20SQ
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- What are the four categories of aggregate expenditure (demand)? Give an example of each. 9.1 Calculate the Marginal Propensity to Consume and the Marginal Propensity to Save. Fill in the blanks in the following table. Show that the MPC plus the MPS equals 1. National Income & Real GDP (Y) Consumption (C) Saving (S) MPC MPS $9,000 $8,000 $10,000 $8,600 $11,000 $9,200 $12,000 $9,800 $13,000 $10,400arrow_forwarda) The accompanying table shows gross domestic product (GDP), disposable income (YD), consumer spending (C), and planned investment spending (I-planned) in an economy. Assume there is no government or foreign sector in this economy. Complete the table by calculating planned aggregate spending (AE-planned) and unplanned inventory investment (I-unplanned) b) What is the aggregate consumption function? c) What is Y*, income-expenditure equilibrium GDP? d) What is the value of the multiplier? e) If planned investment spending falls to $200 billion, what will be the new Y*? f) If autonomous consumer spending rises to $200 billion, what will be the new Y*?arrow_forwardGovernment expenditures represents one of the injections of expenditure. Explain how an increase in government spending may have a multiplier effect in the economy.arrow_forward
- Given the following information. C = 600 + 0.8Yd , Yd = Y – T, Tg = 100, I= 200, R = 50, G = 350, X = 250 and M = 200 + 0.1Y. Calculate the equilibrium level of income (Ye). Show the equilibrium level of income by using diagrams of both aggregate expenditure-income (AE-Y) approach and injection-leakage approach How much investment should be increased if the government wants to increase the national income by 2000? How much tax has to be reduced so that the national income will increase by 2000? Based on the answer in Question 2(a), if the government undertakes expansionary fiscal policy by increasing government expenditure by 400, calculate the new equilibrium level of income. After being at the equilibrium level of income in Question 2(e) above, if the government reduces the tax by 400, what is the new equilibrium level of income? Starting with the original information above, if the government runs a balanced budget i.e. increases the government…arrow_forwardRefer to the table on the next page in answering the questions that follow:a. If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? What will be the consequence of this gap? By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the inflationary expenditure gap or the recessionary expenditure gap? Explain. What is the multiplier in this example?b. Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is $500 billion? Explain the consequences. By how much would aggregate expenditures in column 3 have to change at each level of GDP to eliminate the gap? What is the multiplier in this example? c. Assuming that investment, net exports, and government expenditures do not change with changes in real GDP, what are the sizes of the MPC, the MPS, and the multiplier?arrow_forwardUse the following information on economy X to answer the questions below. Consumption function: C = 250 + 0.8Y Investment spending: I = 150 Government spending: G = 500 Exports of goods and services: X = 200 Imports of goods and services: Z = 150 Proportional tax rate: t =25% Full employment level of income = 3575 a) Calculate total autonomus spending for economy X. b) Calculate the multiplier for economy X. c) Calculate the equilibrium income for the economy. d) Calculate the change in government spending required to reach full employment level of income.arrow_forward
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