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
What is equilibrium income in Hypothetical? What is the government deficit? Whatis the balance of Trade?
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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.
Please Read the Following Paragraph and Answer the Following Questions Oman’s government will finance most of its budget shortfall in 2021 by borrowing to plug a fiscal gap battered by a decline in oil prices and the coronavirus pandemic. The Persian Gulf state is looking into borrowing that will cover 73%, or 1.6 billion rials ($4.2 billion), of the country's 2.2 billion-rial shortfall, with the remaining 600 million rials to be drawn from its reserves, according to a post on Twitter by the state-run Oman News Agency on Friday. The government based its 2021 budget plan on an oil price of $45 per barrel. Other highlights from Oman’s 2021 budget: • Expenditure is set to fall to 10.8 billion rials, a 14% drop from the previous year. • 2021 revenue is set to fall to 8.6 billion rials, a 19% decline. • Budget deficit at 8% of gross domestic product in 2021, 2.2 billion rials. Oman has taken measures such as reduced spending and plans to impose a 5% value-added tax in 2021.…
Consider an economy described by the following equations. Y=C+I+G C=100+.75(Y−T) I=500−50r G=125 T=100 Where: Y is GDP, C is consumption, I is investment, G is government spending, T is taxes and r is the rate of interest. Question: 1. Assuming that no change in fiscal policy, what is the effect of a reduction in interest rate from 4 percent to 3 percent on equilibrium output? 2. Suppose the Central Bank policy is to adjust the money supply to maintain the interest rate at 4 percent, so r=4. What is the value of output?
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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