Question

In: Economics

1. (A-D) A) a = 400 b = .9 I = 300 G = 200 T...

1. (A-D)

A)

a = 400

b = .9

I = 300

G = 200

T = 150

(b = MPC)

a) Solve for Y* (equilibrium output)

b) What is the value of the spending (Keynesian) multiplier?

c) What is the value of the tax multiplier?

d) What is the value of the 'balanced budget' multiplier?

B)

a = 400

b = .9

I = 300

G = 300 (an increase of 100 from A above)

T = 150

a) Solve for Y* (equilibrium output)

C)

a = 400

b = .9

I = 300

G = 200

T = 250 (an increase of 100 from A above)

a) Solve for Y* (equilibrium output)

D)

a = 400

b = .8

I = 400

G = 600

t (tax rate) = 25%

a) Solve for Y* (equilibrium output)

Solutions

Expert Solution

A)

a = 400=CA

b = .9=MPC

I = 300

G = 200

T = 150

a) Solve for Y* (equilibrium output)

Answer:

C= CA+MPC Yd

C=400+0.9Yd

In Equilibrium Y=AD

Y=C+I+G=400+0.9Yd+300+200

Y=400+0.9(Y-T)+300+200

Y=400+0.9Y-0.9*150+300+200

Y= 900+0.9Y-135

0.1Y=765

Y=765/0.1 = 7650

Y*=7650

b) What is the value of the spending (Keynesian) multiplier?

Answer:

Spending Multiplier =ΔY/ΔG

ΔY/ΔG = 1/1-MPC = 1/1-0.9 = 1/0.1 = 10

c) What is the value of the tax multiplier?

Answer:

Tax Multiplier =ΔY/ΔT = -MPC/MPS

MPS = 1-MPC = 1-0.9 = 0.1

Tax Multiplier = -0.9/0.1 = -9

d) What is the value of the 'balanced budget' multiplier?

Answer:

Balanced budget multiplier = ΔY/ΔG+ ΔY/ΔT

=10-9

= 1

B)

a = 400=CA

b = .9 = MPC

I = 300

G = 300 (an increase of 100 from A above)

T = 150

a) Solve for Y* (equilibrium output)

Answer:

C= CA+MPC Yd

C=400+0.9Yd

In Equilibrium Y=AD

Y=C+I+G=400+0.9Yd+300+300

Y=400+0.9(Y-T)+300+300

Y=400+0.9Y-0.9*150+300+300

Y= 1000+0.9Y-135

0.1Y=865

Y=865/0.1 = 8650

Y*=8650

C)

a = 400=CA

b = .9=MPC

I = 300

G = 200

T = 250 (an increase of 100 from A above)

a) Solve for Y* (equilibrium output)

Answer:

C= CA+MPC Yd

C=400+0.9Yd

In Equilibrium Y=AD

Y=C+I+G=400+0.9Yd+300+200

Y=400+0.9(Y-T)+300+200

Y=400+0.9Y-0.9*250+300+200

Y= 900+0.9Y-225

0.1Y=675

Y=675/0.1 = 6750

Y*= 6750

D)

a = 400=CA

b = .8= MPC

I = 400

G = 600

t (tax rate) = 25%

a) Solve for Y* (equilibrium output)

Answer:

C= CA+MPC Yd

C=400+0.9Yd

In Equilibrium Y=AD

Y=C+I+G=400+0.9Yd+300+600

Y=400+0.8(Y-T)+400+600

Y=400+0.8Y-0.8*25%+400+200

Y= 900+0.9Y-0.8*0.25

0.1Y=900-0.2

Y=899.8/0.1

Y*= 8998

Rahul Sunny answered 2 years ago
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