Question

In: Economics

1.         Let’s look at Canada.  Assume an equilibrium where Aggregate Expenditure is $1,350 billion and Real GDP in...

1.         Let’s look at Canada.  Assume an equilibrium where Aggregate Expenditure is $1,350 billion and Real GDP in $1,350 billion.  (a)  If Real GDP grew to 1,600, but AE only grew to 1,550 what is the marginal propensity to consume?  0.8

(b)  From the initial state of $1,350, what change in taxes (positive or negative and actual numeric value) would bring GDP to $1,200 billion?  

Solutions

Expert Solution

a.

MPC is the change in AE by a division of change in real GDP.

MPC = Change in AE / Change in real GDP

            = (1,550 – 1,350) / (1,600 – 1,350)

            = 200 / 250

            = 0.8 (Answer)

b.

GDP reduces from $1,350 to $1,200. Therefore, the tax effect is negative here.

GDP is the aggregate of consumption (C), private investment (I), and government spending (G).

GDP = C + I + G

If there is no change in I and G, the imposition of tax reduces consumption and this is the reason why GDP is gone down.

Amount of tax = GDP before tax – GDP after tax

                        = 1,350 – 1,200

                        = $150 (Answer)

Rahul Sunny answered 2 years ago
Next > < Previous

Related Solutions

1. In the aggregate planned expenditure model, the equilibrium level of GDP can be determined by...
1. In the aggregate planned expenditure model, the equilibrium level of GDP can be determined by finding the output level at which the unplanned change in inventories is less than aggregate expenditures equal to government expenditures greater than aggregate expenditures equal to consumer spending equal to zero 2. The shape of the long-run aggregate supply curve suggests that Potential GDP is negatively related to the average price level Potential GDP is the amount of output that can be produced if...
how to get the multiplier from aggregate expenditure and real GDP graph?
how to get the multiplier from aggregate expenditure and real GDP graph?
In the expenditure–output or Keynesian cross model, the equilibrium occurs where the aggregate expenditure line (AE...
In the expenditure–output or Keynesian cross model, the equilibrium occurs where the aggregate expenditure line (AE line) crosses the 45° line. Given algebraic equations for two lines, the point where they cross can be calculated easily. Imagine an economy with the following characteristics. Y = Real GDP or national income C = Consumption = 50 + 0.8Y I = Investment = 200 G = Government spending = 100 Calculate the equilibrium level of income (Y) Suppose G increases to 125...
Consider a macroeconomy was initially at equilibrium level of real GDP. Using an aggregate demand and...
Consider a macroeconomy was initially at equilibrium level of real GDP. Using an aggregate demand and aggregate supply diagram or model of the economy, illustrate and explain the short-run consequences of the following events upon an economy: The Central Bank within the economy lifts interest rates: There is an increase in private domestic investment spending; An increase in the good and services tax (GST); An appreciation or rise in the foreign exchange rate value of the economy’s currency; A fall...
Assume that Canada is initially in long run equilibrium with price level of P1 and GDP...
Assume that Canada is initially in long run equilibrium with price level of P1 and GDP of Y1. Discuss how each of the following four events would affect aggregate demand, the price level and real GDP of Canada. i. There is a sharp fall in Canada’s exchange rate ii. A wave of pro-Canadian sentiment sweeps the U.S. and people in U.S. increase their consumption of Canadian goods iii. There is a recession in China, which is a large importer of...
Assume that Canada is initially in long run equilibrium with price level of P1 and GDP...
Assume that Canada is initially in long run equilibrium with price level of P1 and GDP of Y1. Discuss how each of the following four events would affect aggregate demand, the price level and real GDP of Canada (mentioning how net exports are impacted) a. There is a sharp fall in Canada’s exchange rate b. A wave of pro-Canadian sentiment sweeps the U.S. and people in U.S. increase their consumption of Canadian goods c. There is a recession in China,...
a) Real GDP is currently $4,500 billion, and potential GDP is $4,600 billion. If government spending...
a) Real GDP is currently $4,500 billion, and potential GDP is $4,600 billion. If government spending increases by $35 billion, what does the multiplier equal to? Show the effect the change will have on macroeconomic equilibrium. b) By how much does taxes have to change to create the same effect?
3. Discuss how spending and output influences equilibrium in a simple model where aggregate expenditure =...
3. Discuss how spending and output influences equilibrium in a simple model where aggregate expenditure = consumption. 4. Describe how unplanned inventory can influence equilibrium in the model where AE=(C+I+G+(X-M))
Assume that aggregate expenditures are greater than real GDP. What will happen to unplanned inventories? What...
Assume that aggregate expenditures are greater than real GDP. What will happen to unplanned inventories? What will happen to actual investment? What will happen to production and employment levels in the next period?
"When the price level increases, aggregate planned expenditure increases and equilibrium expenditure increases." Is this statement...
"When the price level increases, aggregate planned expenditure increases and equilibrium expenditure increases." Is this statement correct? Discuss by giving appropriate examples of scenario, data and/or diagrams to justify your answer.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT