3. The balanced budget multiplierFor both political and macroeconomic reasons, governments are often reluctant to runbudget deficits. Here, we examine whether policy changes in G and T thatmaintain a balanced budget are macro economically neutral. Put another way, weexamine whether it is possible to affect output through changes in G and T so thatthe government budget remains balanced.Start from equation (3.8):Y=k, +i+G-c7]1-Ga. When G increases by one unit, Y increases by,b. When T increases by one unit, Y increases bySuppose that the economy starts with a balanced budget: G =T. Suppose that GandT increase by one unit each. Using your answers to (a) and (b), the change in. Is balanced budget changes in G and TmacroeconomicallyY equals_neutral? (yes or no)

Given; Income equation:- Y=11-c1c0+I+G-c1T a) When G increases by one…

Answered: 3. The balanced budget multiplier For…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the economy reaches equilibrium GDP at $1,250,000 while potential GDP is at $1,500,000. Currently G=$180,000 while taxes are equal to 0.1Y (where Y is the same as real GDP). a. How large is the recessionary gap in this economy? b. At equilibrium GDP, is there a budget surplus or deficit? Solve for the value of this surplus or deficit. At the potential GDP, is there a surplus or deficit? Solve for the value of the full- employment surplus or deficit. d. Does there exist a cyclical surplus or deficit? Solve for its value C.
Principles List 6: Principle 1. Explain what it means If The Marginal Propensity to Consume = 2/3 And draw a Consumption Curve with The Marginal Propensity to Consume = 2/3 principle 2. Define equilibrium in the Aggregate Expenditures Model or the Keynesian Model and illustrate the Equilibrium graphically Principle 3. Define the expenditures Multiplier and illustrate it graphically Principle 4. Distinguish between Fiscal Policy solution for a recession and Monetary Policy for a recession
QUESTION 21 Consider the following economy with: Y = 220 N-2N^2, MPN = 220-4N, NS = 8.75 w+0.2T, where T =50 is lump-sum tax. The government maintains a balanced budget such that T-G for all economies. C^d = 0.4 Y- 1000r-0.4 T, I^d=3613.125-500r, M^d=P*(0.4 Y- 2000 i), M=9275, expected inflation rate =0.04. What is the full-employment level of output? O less than or equal to 6000 greater than 6000 and less than or equal to 6100 greater than 6100 and less than or equal to 6200 O greater than 6200 and less than or equal to 6300 O greater than 6300 QUESTION 22 Consider the following economy with: Y = 220 N-2N^2, MPN = 220-4N, NS = 8.75 w+0.2T, where T-50 is lump-sum tax. The government maintains a balanced budget such that T-G for all economies. C^d = 0.4 Y - 1000r-0.4 T, I^d = 3613.125-500r, M^d=P*(0.4 Y- 2000 i), M=9275, expected inflation rate=0.04. What is the real interest rate that clears the goods market? O less than or equal to 0.01 greater than 0.01 and less than or equal to 0.02…
2. Assume a given economy has an equilibrium GDP of $360 billion. A. If government spending and taxes both increase by $40 billion, determine the new equilibrium GDP. B. If both G and taxes increase by $40 billion, what impact will these two changes happening at the same time have on the budget? In other words, will these two changes cause a surplus, a deficit, or a balanced budget? C. Solve for the numerical value of the balanced budget multiplier.
Suppose that the government wants to conduct expansionary fiscal policy. Show graphically the relative differences in the amount of Investment that is crowded out if the economy is: Closed, Small Open, and Large Open. From this which would we expect to have the largest fiscal multiplier?
Question 2In the basic Keynesian model, fiscal policy should not cause an increase in the public debt. However, in this course you have learnt that most national governments have accumulated public debt by mis-using the Keynesian model. The worst example cited is that of Greece. Explain why governments find it difficult if not impossible to use fiscal policy without accumulating debt. Explain how discretionary fiscal policy is different from automatic stabilizers. Which one is the more likely to cause the debt accumulation problem in part A? Explain why a foreign debt is worse than a domestic debt.
1.Suppose MPC = 0.75, if government increases taxes by $2,000, how much will the household consumption increase or decrease initially?

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