Consider a hypothetical closed economy in which the marginal propensity to consume (MPC) is 0.8 and taxes do not vary with income (that is,taxes are fixed rather than variable and the income tax rate = 0). The following graph shows the aggregate demand curves (AD and AD₂), theshort-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A.PRICE LEVEL128ལྕ་སྐྱ་སྐྱ་སྐྱ་རྩ་སྐྱ124120A116112108200300400Potential GDPAS124AD₂AD₁500600 7008009001000REAL GDP (Billions of dollars)The economy is currently experiencing a recessionary gap of $100 billion.To close this gap, one option would be for the government to increasenot change).government purchases by$20 billion (assuming net taxes doIf the government kept its purchases constant, it could also close the gap by(Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes isnet taxes (taxes minus transfers) by s-MPC.)1-MPCbillion.

Answered: Image /qna-images/answer/acb1856d-815d-4c9c-abeb-df1ba8ab1a7a.jpg

Answered: Consider a hypothetical closed economy…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The Aggregate Expenditure Model is traditionally called the” Keynesian Cross”. Use the Aggregate Expenditure Keynesian Cross diagram to show what happens to the economy under the following conditions: (Note that is different from the AS-AD Model.) What happens in the model if government expenditures are increased (G↑)? What happens if taxes are raised (T↑)? What happens to the US economy if the rest of the world experiences economic growth and imports more US goods (X↑)?
Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional doilar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is , and the spending multiplier for this economy is Suppose the government in this economy decides to decrease government purchases by $400 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to This decreases income yet again, leading to a second change in consumption equal to The total change in demand resulting from the initial change in government spending is
Part B: Aggregate Demand (AD) Curve shows the relationship between the economy’s price level and real GDP demanded. In other words, real GDP demanded by different groups of buyers, i.e., Consumers (C), Businesses (I), Government (G), and Net Amount by Foreigners (Export - Import), at different price levels give us points on a graph, which are connected to form a curve called AD curve. Review the textbook chapter, and conduct internet research to discuss determinants of AD or factors that shift AD curve.
The following graph plots an aggregate demand curve. Using the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy. Suppose the governments of two very similar economies, economy Y and economy Z, implement a tax cut of equal size. The tax cut in economy Y is temporary, while the tax cut in economy Z is permanent. The economies are otherwise completely identical. The tax cut will have a smaller impact on aggregate demand in the economy with the (temporary tax cut/permanent tax cut) .
If taxes increases from $100 billion to $139 billion, and the MPC is 0.8, how much is the change in aggregate demand?
The following graph shows aggregate demand (AD) and aggregate supply (AS) curves for a hypothetical economy. PRICE LEVEL (CPI) 140 135 130 125 120 115 110 105 100 95 90 200 220 240 AS AD 260 280 300 320 340 REAL GDP (Billions of dollars) 360 380 400 AD₂ New Macro Eq ? Suppose the full employment output level in this economy is $300 billion. In order to move the economy to full-employment output at the lowest possible price level, the aggregate demand curve must shift to the by at each price level.
Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical…
The policies of the federal government influence the outcomes of the various activities in that economy. When government policies change or unplanned events occur, the resulting economic events or activity will usually change. Listed below is a policy or event that affect the performance of the economy: The level of investment decreases because of a lack of confidence in the economy. for the question above, describe what would be the likely outcome in the economy. Use the appropriate tools of analysis, such as aggregate demand and aggregate supply where appropriate, to justify and explain your answer.
The following graph shows the aggregate demand (AD) curve in a hypothetical economy. At point A, the price level is 140, and the quantity of output demanded is $300 billion. Moving down along the aggregate demand curve from point A to point B, the price level falls to 120, and the quantity of output demanded rises to $500 billion. 170 100 180 140 130 120 110 AD 100 00 100 200 300 400 B00 700 OUTPUT (Billians of dollars) As the price level falls, the cost of borrowing money will , causing the quantity of output demanded to Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore and the number of foreign products purchased by domestic consumers and firms (imports) will Net exports will therefore causing the quantity of domestic output demanded to
Assume a infinitely elastic short-run aggregate supply. Consider the following economy: C=C + 8/10 X YD 1=1 TR=TR G=G T=¹/4 X Y X=0 M=0 Potential GDP is 1000, while current GDP is 930. Assuming the mpc on changes in transfers is 1, what is the change in autonomous net transfers that will close the output gap? Round to two decimal places, do not enter the $ sign and remember the minus sign if appropriate. If your answer is -$6.125, enter -6.13.
Suppose government purchases increase by $100 billion. The MPC is 0.75. a) What is the value of the multiplier? b) If there is $200 billion worth of crowding out, what will be the net increase in aggregate demand?
Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy.

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