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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An amendment to the Texas Constitution requires a balanced budget. This means that _____. A. any increase in government spending must be offset by a decrease in the total funds allocated to the General Revenue budget B. the legislature cannot approve a budget if it exceeds the projected revenues for the state by more than 30 percent C. the legislature cannot approve a budget if it exceeds the projected revenues for the state by more than 10 percent D. any increase in government spending must be offset by an increase in revenue and/or cuts in spending elsewhere in the budget
8. Agreement and disagreement among economists Suppose that Kevin, an economist from a consulting firm, and Maria, another economist from a graduate program in the Northeast, are both guests a popular science podcast. The host of the podcast is facilitating their debate over budget deficits. The following dialogue represents a portion of the transcript of their discussion: Maria: Most people recognize that the budget deficit has been rising considerably over the last century. We need to find the best course of action to remedy this situation. Kevin: I believe that a cut in income tax rates would boost economic growth and raise tax revenue enough to reduce budget deficits. Maria: I actually feel that raising the top income tax rate would reduce the budget deficit more effectively. The disagreement between these economists is most likely due to Despite their differences, with which proposition are two economists chosen at random most likely to agree? Central banks should focus more on…
G Spending and NTR Budget Deficit Budget Surplus Y1 V1 . I I Y2 V2 je I I Y3 I V3 G NTR Real GDP BL Real GDP In the following graph, NTR is net tax revenue, G is government spending on goods and services, BL is budget line. Which of the following is true? A balanced budget would occur at income level Y1 A balanced budget would occur at income level Y2 A balanced budget could occur at income levels Y1, Y2 or Y3 The existence of a balanced budget cannot be determined because no inflation on tex revenues is given
8. Agreement and disagreement among economists Suppose that Larry, an economist from a college in Pennsylvania, and Megan, another economist from an investigative reporting group, are both guests on a popular science podcast. The host of the podcast is facilitating their debate over budget deficits. The following dialogue represents a portion of the transcript of their discussion: Megan: Most people recognize that the budget deficit has been rising considerably over the last century. We need to find the best course of action to remedy this situation. Larry: I believe that a cut in income tax rates would boost economic growth and raise tax revenue enough to reduce budget deficits.. Megan: I actually feel that raising the top income tax rate would reduce the budget deficit more effectively. The disagreement between these economists is most likely due to differences between perception versus reality Despite their differences, with which proposition are two economists chosen at random most…
17 The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession. Price Level 160 140 120 100 80 60 40 20 0 (40, 100) Fiscal Policy LRAS प्रै ======= AD₁ billion AS 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars) $| Suppose instead that the MPC is 0.5. AD Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ billion b. If the MPC is 0.6, how much does government purchases need to change to shift aggregate demand by the amount you found in part a? c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and government purchases need to change by $ billion.
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.
1. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is 0.8 Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to $320 billion . This increases income yet again, causing a second change in consumption equal to $256 billion $2 trillion ($2,000 billion) The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD,) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate…
6. What change in government spending (airports, police, teachers, roads, etc.) would reestablish full employment with price stability? 7. What change in taxes would achieve the same goal? Explain why it is different from the change in government and is the opposite sign. 8. Should we balance the budget in this situation? And why? Q4. Suppose that in the closed economy of Keynesia, consumption is given by C = 100 + 0.75(Y -T). Investment I is constant at 200, government purchases G are 160, and the government’s budget is balanced so G = T. Aggregate supply responds passively to changes in demand, so Y = C+I+G. a. What is the marginal propensity to consume? b. Use algebra to find the equilibrium value of Y, the equilibrium level of income? c. If government spending rises to 180 with no change in taxes, what will happen to the Keynesian equilibrium level of income? What is the government-expenditure multiplier AY/AG? d. If taxes increase to 180 with no change in government spending, what…
Consider an economy in which the marginal propensity to consume is 0.8 and GDP is currently at 12,000. a) The government wishes to increase GDP to 13,000, and it is considering changing only one of its fiscal tools: 1. government purchases 2. taxes 3. transfer payments How much would the government have to change each of these fiscal policy tools to achieve its goal? (Use the simple spending multiplier for this part and below.) b) Suppose instead that the government wishes to reduce GDP to 10,000, and again, it is considering using only one of its three available fiscal policy tools. How much would it change each of these fiscal tools to achieve its goal?
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?
5. Fiscal policy, the money market, and aggregate demand Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they over. The following graph plots the economy's initial aggregate demand curve (AD1). Suppose now that the government increases its purchases by $2.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD₂) after the multiplier effect takes pla Hint: Be sure the new aggregate demand curve (AD2) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following gra (?) PRICE LEVEL 116 114 112 110 108 106 104 102 100 100 12 AD₁ 10 102 104 106 108 110 112 OUTPUT (Billions of dollars) 114 116 Money Supply Į þ The following graph plots equilibrium in the money market at an interest rate of 6% and a quantity of money equal to $15 billion. AD2 Show the impact of the increase in government purchases on the interest rate by shifting one or…
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?

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