In: Economics
Given the following data for a hypothetical closed economy:
Real GDP (GDP = Y) |
Taxes |
Yd |
C |
S |
I |
G |
AE |
200 |
50 |
190 |
80 |
50 |
|||
250 |
50 |
220 |
80 |
50 |
|||
300 |
50 |
250 |
80 |
50 |
|||
350 |
50 |
280 |
80 |
50 |
|||
400 |
50 |
310 |
80 |
50 |
|||
450 |
50 |
340 |
80 |
50 |
|||
500 |
50 |
370 |
80 |
50 |
|||
550 |
50 |
400 |
80 |
50 |
|||
600 |
50 |
430 |
80 |
50 |
|||
650 |
50 |
460 |
80 |
50 |
|||
700 |
50 |
490 |
80 |
50 |
(I)
Y | T | Yd | C | S | I | G | AE |
200 | 50 | 150 | 190 | 10 | 80 | 50 | 320 |
250 | 50 | 200 | 220 | 30 | 80 | 50 | 350 |
300 | 50 | 250 | 250 | 50 | 80 | 50 | 380 |
350 | 50 | 300 | 280 | 70 | 80 | 50 | 410 |
400 | 50 | 350 | 310 | 90 | 80 | 50 | 440 |
450 | 50 | 400 | 340 | 110 | 80 | 50 | 470 |
500 | 50 | 450 | 370 | 130 | 80 | 50 | 500 |
550 | 50 | 500 | 400 | 150 | 80 | 50 | 530 |
600 | 50 | 550 | 430 | 170 | 80 | 50 | 560 |
650 | 50 | 600 | 460 | 190 | 80 | 50 | 590 |
700 | 50 | 650 | 490 | 210 | 80 | 50 | 620 |
(II)
In breakeven, Y = AE = 500
(III)
Equilibrium GDP = 500
(IV)
Spending Multiplier = Change in Y / Change in AE = (250 - 200) / (350 - 320) = 500 / 300 = 5/3 = 1.67
(V)
MPC = Change in C / Change in Y = (220 - 190) / (250 - 200) = 30/50 = 0.6
Tax multiplier = - MPC / (1 - MPC) = - 0.6/0.4 = - 1.5
Positive output gap = Equilibrium Y - Potential G = 500 - 440 = 60
Required decrease in G = Positive output gap / Spending multiplier = 60 / (5/3) = 36
Required increase in T = Positive output gap / Tax multiplier = 60 / 1.5 = 40
(VI)
(a) Consumption: C = a + bY
190 = a + 200b..............(1)
220 = a + 250b..............(2)
(2) - (1) yields:
50b = 30
b = 0.6
a = 190 - 200b [from (1)] = 190 - (200 x 0.6) = 190 - 120 = 70
Therefore,
C = 70 + 0.6Y
(b) Saving: S = Y - C
S = Y - 70 - 0.6Y
S = - 60 + 0.4Y