Question

AE = Y

AE = C + I + G

C = a + bYd

Yd = Y - T

A.

Given the values below, is the value of the spending (Keynesian) multiplier?

What is the value of the tax multiplier?

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

Solve for Y*.

a = 300

MPC = .6

I = 350

G = 400

T = 0

B. Given the values below, solve for Y* (equilibrium output).

a = 300

MPC = .6

I = 350

G = 400

T = 250

C. Given the values below, solve for Y* (equilibrium output).

a = 300

MPC = .6

I = 350

G = 400

T = 350 (an increase of 100 from 1B above)

D. Given the values below, solve for Y* (equilibrium output).

a = 300

MPC = .6

I = 350

G = 500 (an increase of 100 from 1B above)

T = 250

E. Given the values below, solve for Y* (equilibrium output).

a = 300

MPC = .6

I = 350

G = 500 (an increase of 100 from 1B above)

T = 350 (an increase of 100 from 1B above)

F. It is more realistic to assume a percentage tax rate (t) , rather than a flat tax. Given the values below, solve for Y*.

a = 300

MPC = .8

I = 200

G = 300

t = 25%

Answer 1

We have the following information

AE = Y; where AE is aggregate expenditure and Y is output

AE = C + I + G

Consumption: C = a + bYD

Disposable Income: YD = Y – T; where T is taxes

Part a) MPC = 0.6; where MPC is marginal propensity to consume

Spending multiplier = 1/(1 – MPC) = 1/(1 – 0.6) = 1/0.4 = 2.5

Tax multiplier = MPC/(1 – MPC) = 0.6/(1 – 0.6) = 0.6/0.4 = 1.5

Balanced budget multiplier = 1

Part b) a = 300

MPC = 0.6

I = 350

G = 400

T = 250

Y = C+I+G

Y = 300 + 0.6(Y – T) + 350 + 400

Y = 1050 + 0.6(Y – 250)

Y = 1050 + 0.6Y – 150

Y = 900 + 0.6Y

0.4Y = 900

Y* = 2250

Part c) a = 300

MPC = 0.6

I = 350

G = 400

T = 350

Y = C+I+G

Y = 300 + 0.6(Y – T) + 350 + 400

Y = 1050 + 0.6(Y – 350)

Y = 1050 + 0.6Y – 210

Y = 840 + 0.6Y

0.4Y = 840

Y* = 2100

Part d) a = 300

MPC = 0.6

I = 350

G = 500

T = 350

Y = C+I+G

Y = 300 + 0.6(Y – T) + 350 + 500

Y = 1150 + 0.6(Y – 350)

Y = 1150 + 0.6Y – 210

Y = 940 + 0.6Y

0.4Y = 940

Y* = 2350