d. Suppose that both G and T increase by one unit. Using your answers to (a) and (b), what is the change in equilibrium GDP? Are balanced budget changes in G and T macroeconomically neutral? e. How does the specific value of the propensity to consume affect your answers to (d)? Why?
d. Suppose that both G and T increase by one unit. Using your answers to (a) and (b), what is the change in equilibrium GDP? Are balanced budget changes in G and T macroeconomically neutral? e. How does the specific value of the propensity to consume affect your answers to (d)? Why?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
I need help with d and e
Transcribed Image Text:2) For both political and macroeconomic reasons governments are often reluctant to run
budget deficits. Here, we examine whether policy changes in G and T that maintain a
balanced budget are macroeconomically neutral. Put another way, we examine whether it
is possible to affect output through changes in G and T so that the government budget
remains balanced. Start from the equilibrium condition in the goods market:
Y = c +c₁ (Y-T) +I+G
a. by how much does Y increase when G increases by one unit?
b. By how much does Y decrease when T increases by one unit?
c. Why are your answers to (a) and (b) different?
Suppose the economy starts with a balanced budget: T=G. If the increase in G is equal to
the increase in T, then the budget remains in balance. Let us now compute the balanced
budget multiplier.
d. Suppose that both G and T increase by one unit. Using your answers to (a) and (b),
what is the change in equilibrium GDP? Are balanced budget changes in G and T
macroeconomically neutral?
e. How does the specific value of the propensity to consume affect your answers to (d)?
Why?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education