An economy is initially described by the following equations: C - 60 + 0.8(Y-T) I- 120-Sr MIP - Y-25, G= 200 т- 200 M - 3000 P- 3 b. Suppose that a newly elected president cuts taxes by 25 percent. Assuming the money supply is held constant, what are the new cquilibrium interest rate and level of income? What is the tax multiplier? new equilibrium r: new cquilibrium Y: tax multiplier:

An economy is initially described by the following equations: C - 60 + 0.8(Y-T) I- 120-Sr MIP - Y-25, G= 200 т- 200 M - 3000 P- 3 b. Suppose that a newly elected president cuts taxes by 25 percent. Assuming the money supply is held constant, what are the new cquilibrium interest rate and level of income? What is the tax multiplier? new equilibrium r: new cquilibrium Y: tax multiplier:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

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 instead that the government wishes to maintain taxes at $200 billion(T=200), but wants to achieve an equilibrium level of national income of $4200 billion(Y=4200) by increasing government spending. To achieve this result, by how much mustgovernment spending increase?
Suppose that real GDP is currently $1.45 trillion, potential GDP is $1.51 trillion, the government purchases multiplier is 2.4, and the tax multiplier is 2. a. Holding other factors constant, government purchases will need to be increased by $ 0.0250 trillion to bring the economy to equilibrium at potential GDP. (Round to four decimal places as needed.) b. Holding other factors constant, taxes have to be cut by $ 0.0300 trillion to bring the economy to equilibrium at potential GDP. (Round to four decimal places as needed.) c. Construct an example of a combination of increased government spending and tax cuts that will bring the economy to equilibrium at potential GDP. The combination of increasing government spending by $0.0600 trillion and cutting taxes by $ trillion will bring the economy to equilibrium at potential GDP (Round to four decimal places as needed.) $0.0600 trillion $0.1440 trillion $0.1200 trillion $0.0100 trillion
Section 2 - Exercises Exercise 1: Automatic stabilisers Assume a closed economy (no import or export) characterised by the following equations describing the behaviour of aggregate demand: Consumption function: C = Co + C₁ (YT) T = to +t₁Y [Taxation rule] Investment and government spending are assumed to be constant: I = I and G = G Where co is autonomous consumption, tå is autonomous taxation, c₁ = 0.6 is the marginal propensity to consume, t₁ = 0.2 is the sensitivity of tax revenues to income. a) Explain why it is reasonable to assume that government tax revenues would respond to changes in income. b) Solve for the equilibrium output in the goods market. c) What is the Keynesian multiplier in this economy? How is it related to the parameters of the model. d) Assume autonomous consumption co falls by £1 Billion. Calculate the change in equilibrium output. e) Represent the effect of the shock on a Keynesian cross diagram. f) Complete the table below and explain in words how the…
In the first quarter 2020, the unemployment rate in the Gaza Strip reached to 69% due to COVID 19. If the Palestinian government decided to solve this problem by an expansionary fiscal policy. Explain the impacts of this policy on the interest rate and aggregate output? Using graph?
Exhibit 24-1 shows the short run and long run equilibrium in an aggregate demand-aggregate supply model. If the economy is initially at point G which of the following changes will most likely be observed when a contractionary fiscal policy is adopted? a) The SRAS curve will shift to the left b) Real GDP will increase above Y2 c)The aggregate demand curve will shift from AD** to AD d)The LRAS curve will shift to the right
Use the aggerate demand and aggerate supply model to analyze the impact on the following scenarios As a result, of this change in fiscal policy is the likely short run effect on prices and unemployment? Prices increase, unemployment increases Prices decrease, unemployment increases Prices decrease, unemployment decreases Prices increase, unemployment decreases Incorrect Question 18 As a result of this effects, the population believes that inflation will be higher in the future, What are the effects of this change? Lower prices and higher unemployment Lower prices and unemployment Higher prices and and lower unemployment Higher prices and unemployment
Assume the tax multiplier is estimated to be 1.3 and the aggregate supply curve has its usual upward slope. Suppose the government lowers taxes by $75 million. Aggregate demand will by $ million. (Enter your response rounded to one decimal place.)
a) What are the three fiscal policy tools and how would each be used to counter a contractionary gap? b) True or False and explain: Fiscal Policy is effective at reducing the duration of an economic contraction. c) If the spending multiplier is 2.5 and the economy is in a $500 billion contractionary gap, how much should I increase government purchases to eliminate the gap? d) Continuing with c, if the MPC is 0.8, how much would I need to increase transfer payments to eliminate the $500 billion contractionary gap? e) True or False and explain: Households always react to tax changes in a predictable manner. Module 6: Deficits and the Debt. a) Distinguish between deficit and debt. b) Explain what crowding out is and why it reduces the impact of fiscal stimulus. c) True or false and explain: The national debt represents a threat of bankruptcy. (For d and e) Suppose the interest on the debt was $600 billion. If interest is paid domestically, 90% will be spent domestically (the remainder is…
Give only typing answer with explanation and conclusion
supply equation is Y - Ypot + 80 (P-Pe), where Ypot is the potential level of output. In 2016, the population was 400 million, and the structure of the economy was described by the following equations for household consumption behavior and taxes received: C = 100+ 0.8DI, and T = 0. where all monetary values are in billions of dollars. Government spending was fixed at $1700 billion, and firm's investment behavior was fixed at $800 billion. Trading is allowed in this economy and in 2016, trading occurred such that the trade account was balanced. That is, net exports (X-IM) was equal to zero. (Question 15 of 20) Now consider that in in the following year (2017), the government decided to implement a policy aimed at moving the economy to full employment. In its decision to move the economy to full employment, they used government spending as the policy tool. The structure and fixed spending behaviors remain the same as they were in 2016, except for government spending. In addition, changes…
Q.1.4 Which of the following statements about Fiscal Policy is INCORRECT? (a) In order to combat inflation, the South African Reserve Bank must apply a contractionary fiscal policy; (b) A contractionary fiscal policy can result in higher levels of unemployment; (c) Expansionary fiscal policy will increase the budget deficit; (d) The application of fiscal policy will have no effect on aggregate supply in the AD-AS model.
An economy is operating with output that is $40 billion below its natural level. And fiscal policy makers want to close this recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant so there is no crowding out. the marginal propensity to consume 4/5 and the price level is completely fixed in the short run. In what direction and by how much would government spending need to change to close the recessionary gap? Explain.