Need help with D and E. 2. The economy in Country X is in a recession, with real gross domestic product (GDP)$100 billion below full-employment output. Country X produces cars and planes.a. Draw one correctly labeled production possibilities graph. Show a point thatrepresents fully employed and efficiently used resources on the graph and label it A.CarsCountry XPPBPlanesb. On your graph in part (a), label as Ca point representing the current state of theeconomy in Country X.c. Explain the following statement; the marginal propensity to consume is .75.equalthePer centeseof newTheMPCis+0incomeS PentConsumption rather than Saved.d. Assume that the government increases spending by $20 billion to stimulateeconomic activity. Assume that the marginal propensity to save is 0.25. Calculate themaximum total change in real GDP that could occur following the $20 billionincrease in government spending.Themax i mumto tal change in real GDPthat CouldOccur Wouldbee. Had the government lowered personal income taxes by $20 billion instead ofincreasing spending by $20 billion, would the maximum total change in real GDP begreater than, smaller than, or the same as the one calculated in part (b) ? Explain.

The government expenditure multiplier is a measure of how much a change in government spending affects overall economic activity. It refers to the amount by which gross domestic product (GDP) increases for every unit increase in government spending. The government expenditure multiplier is typically larger than one because when the government spends more money, it increases the demand for goods and services, leading to higher output and income. This increase in income then leads to further increases in spending, creating a multiplier effect throughout the economy. We are going to find Government expenditure multiplier to answer this question.y=C+Gy=a+bYd+GNow, tax component is provided in the question.Therefore, T=0=τywhere, τ is the tax rate. y=a+b(y-cy)+Gy=a+b(1-c)y+Gy-b(1-c)y=a+G ....... (i)a = Autonomous consumptionG = Government expenditureNow, differentiating eq(i) with respect to G:Government expenses =∆y∆GChange in GDP due to change in Government expenditure =1b(1-c) ∆y∆G=1b(1-c)We have,τ=0b=MPS=0.25Now, if G changes by $20 billion:∆y=∆Gb=200.25=$80 billionTherefore, maximum total change in real GDP is $80 billion. Now, there are positive rates applied in terms of personal tax rates applied in terms of personal tax:τ≠0y=a+b(y-τ1y)+Gy-b(1-τ1)y=a+Gy=a1-b(1-τ1)+G1-b(1-τ1)δyδG=11-0.75(1-τ1)where,δyδG = Tax11-0.75(1-τ1) = Change in real GDP due to change in TaxWe know 0<τ1≤1if τ1=1, then the change in real GDP would be the same as the previous one.But, if τ1<1, real GDP change will be less than the previous part.Therefore, (δy)Tax <(δy)Government Expenditure.

Business

Economics

2. The economy in Country X is in a recession, with real gross domestic product (GDP) $100 billion below full-employment output. Country X produces cars and planes. a. Draw one correctly labeled production possibilities graph. Show a point that represents fully employed and efficiently used resources on the graph and label it A. Country X Cars PP B Planes b. On your graph in part (a), label as Ca point representing the current state of the economy in Country X. c. Explain the following statement; the marginal propensity to consume is .75. The MPC is equal +0 the Per centese of new income S Pent Consumption rather than Saved d. Assume that the government increases spending by $20 billion to stimulate economic activity. Assume that the marginal propensity to save is 0.25. Calculate the maximum total change in real GDP that could occur following the $20 billion increase in government spending. The max i mum +o tyl Change in real GDP that Coud Occu Would be e. Had the government lowered personal income taxes by $20 billion instead of increasing spending by $20 billion, would the maximum total change in real GDP be greater than, smaller than, or the same as the one calculated in part (b) ? Explain.

2. The economy in Country X is in a recession, with real gross domestic product (GDP) $100 billion below full-employment output. Country X produces cars and planes. a. Draw one correctly labeled production possibilities graph. Show a point that represents fully employed and efficiently used resources on the graph and label it A. Country X Cars PP B Planes b. On your graph in part (a), label as Ca point representing the current state of the economy in Country X. c. Explain the following statement; the marginal propensity to consume is .75. The MPC is equal +0 the Per centese of new income S Pent Consumption rather than Saved d. Assume that the government increases spending by $20 billion to stimulate economic activity. Assume that the marginal propensity to save is 0.25. Calculate the maximum total change in real GDP that could occur following the $20 billion increase in government spending. The max i mum +o tyl Change in real GDP that Coud Occu Would be e. Had the government lowered personal income taxes by $20 billion instead of increasing spending by $20 billion, would the maximum total change in real GDP be greater than, smaller than, or the same as the one calculated in part (b) ? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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