40+ YD where Yp is disposable Problem 5. The economy is described by the consumption function C = income, investment I = 170 – 1600r where r is the real interest rate. It is known that the government budget is always balanced, and that the government constantly adjusts fiscal policy, so that government spending is 25% of GDP. The interest rate rule is r = 0.05 + 2(T – 0.04) + 0.15(Y150). Inflation is 4%. Find the equilibrium GDP in the IS/MP model.

40+ YD where Yp is disposable Problem 5. The economy is described by the consumption function C = income, investment I = 170 – 1600r where r is the real interest rate. It is known that the government budget is always balanced, and that the government constantly adjusts fiscal policy, so that government spending is 25% of GDP. The interest rate rule is r = 0.05 + 2(T – 0.04) + 0.15(Y150). Inflation is 4%. Find the equilibrium GDP in the IS/MP model.

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter21: Fiscal Policy

Section: Chapter Questions

Problem 20SQ

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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?
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Assume an economy in which:(i) there are no exports and no imports,(ii) investors always want to spend $200 billion, or I = 200,(iii) government spends $500 billion and tax revenue is $200 billion,(iv) consumption is a linear function of disposable income, C=100+0.8Yd Assume that the government eliminates taxes while keeping governmentspending the same. (Thus T = 0 and G = 500.) The economy’s consumption function andinvestment remain unchanged. What is the new equilibrium level of national income?
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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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The graph shows the income-expenditure model for the country of Mireland, where AE represents aggregate expenditure. The Mirsh government wants to cut spending owing to a huge budget deficit and, as such, decides to reduce infrastructure spending by $6.25 billion. Show the impact of this spending cut given a marginal propensity to consume (MPC) of 0.5 and a total tax take of one-quarter in any changes in GDP. In this example, assume that there is no international trade or inflation, and that interest rates are fixed. Planned aggregate spending (in billions of dollars) 2888898828220 70 65 60 50 45 40 30 25 15 10 45 degree line A new government is elected in Mireland and decides to make even deeper cuts in direct spending, totaling $14 billion. What will be the total change in real GDP? Please provide the answer to the nearest whole billion. Planned AB 05 10 15 20 25 30 35 40 45 50 55 60 65 70 Real GDP Gn billions of dollars) total change in real GDP: $ 10 billion Enter numeric value
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