Ricardian equivalenceIn the following questions, make the following assumptionsu(c) = log(c), R = 0, y₁ = 100, y2=200, f₁ = 50.(a) Suppose government spending in periods 1 and 2 are given by g₁ and 92. Write thegovernment's intertemporal budget constraint.(b) State the Ricardian equivalence hypothesis.(c) Suppose g₁ = 10,92 = 10, and to finance these spending, the government imposes taxes t₁ =10, t₂ = 10. Find the values of C1, C2 and f₂.(d) In an effort to increase today's consumption, suppose the government lowers t₁to 0. Will thischange the values of c₁ and c₂? How about f₂? If any of these changes, compute their values.(e) In words, explain the behavior of the consumers in (c) and (d).

Approach to solving the question:(a) Write the government's intertemporal budget constraint.The…

Answered: Ricardian equivalence In the following…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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a) Write the equation representing snapshot of budget and Indicate the status of the budget as having a surplus or deficit, or balanced at Zero and explain why? How is this budget expected to affect the GDP? Explain! (b) Use the lump-sum tax and the MPC to calculate the decrease in consumption due to this lump sum tax (show all your calculations); then use the change in consumption you just obtained to find the consumption after tax (ca-fill in the column 7 below). (c) Use the Ca to find the (after-tax) aggregate expenditures for the 4-sector private-public-open economy (AEa) and fill in the column 8; Now use the column 1 and column 8 to find the new equilibrium GDP and DI in the 4-sector model. (d) Has GDP increased in the 4-sector compared with those in the previous 3-sector equilibrium? If so, by how much? What is the effective multiplier from 3-sector to 4-sector and why? Explain. (e) Has DI changed from 3-sector to 4-sector? Why/why not? How about consumption and savings? Explain…
Suppose that government is included in the short-run model of national income, where the level of government expenditure is $100 billion and the net tax rate is 50%. Use the line drawing tool to draw and properly label the budget balance function on the graph at right. Make sure that the line extends from Actual National Income level 0 to 1000. Carefully follow the instructions above, and only draw the required objects. Budget Balance ($ billions) The Budget Balance Function 480- 440- 400- 360- 320- 280- 240- 200- 160- 120 80 40- 어 -40- 200 400 -600 800 1000 -80- -120- -160- -200- Actual National Income ($ billions)
Suppose the consumption function is C= $400 billion + 0.9 Y and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially (before multiplier effects) with Instructions: Enter your response as a whole number. (a) A $60 billion increase in government purchases? $ billion Instructions: Enter your responses rounded to one decimal place. (b) A $60 billion tax cut? $ billion (c) A $60 billion increase in income transfers? $ billion What will the cumulative AD shift be for (d) The increased government spending? $ billion (e) The tax cut? $ billion
Please answer fast
No written by hand solution a) Use the AS-AD model to describe the crowding-out effect of private investment occurring when the government decides to decrease taxation (T). Your analysis should include the AS-AD, IS-LM, and the money market graph. b) Assume that the government asked you to estimate how the above reduction in taxes will affect the income/GDP in the economy. How would you answer? (Hint: Mention and discuss not only graphs, but also the formula of the multiplier, and whether the multiplier is an accurate measure
The economy is described by the following functions: Shown in Picture where ?t is the tax rate. Here, the amount of taxes collected depends positively on the gross income. Find the multiplier associated with government purchases. How does this multiplier compare with a model with lump-sum taxes? Why is it lower?
Consider a closed economy with fixed prices and wages. Suppose consumption function takes the form C = 150+0,8Yd, Investments are I = 200, government purchases are G = 350, tax rate t= 0,1. There are no lump-sum taxes. (a) Calculate equilibrium output and Budget Deficit. Plot the planned aggregate spending line and show the equilibrium output. (b) If the Government decides to balance the Budget by changing the tax rate, what new tax rate the Government need to implement? (c) Calculate the new equilibrium output after the change in tax rate. Show how changes in the tax rate affect the planned aggregate spending line and new equilibrium output.
In a keynesian model it is assumed that the consumption function is given by C= 2000 + 0.75 (Y-T) and the planned investment is 1,000 government purchases and taxes are both of those and formulate and draw a graph of planned expenditure as a function of income What is the equilibrium level in the part above If the government purchases increased by 1250 what is the equilibrium income With the aid of a algebra prove that a balanced budget multiplier is always equals to 1
In a simple model without government spending or taxation, if C = a +bY where C is consumer spending and Y is GDP which of the following statements are correct? (Note that the algebra is deliberately written differently from the lecture notes to test your understanding!) Note that some of these questions require you to have read relevant sections of Core Unit 13. Select one or more: O a. a is known as the marginal propensity to consume Ob.a is the level of consumption when Y is zero c. b is known as the marginal propensity to consume O d. b is known as the average propensity to consume Oe. The consumption function implies that if GDP is zero, consumption is zero O f. If there is an increase in consumers who engage in "consumption smoothing", this will cause an increase in a and a decrease in b g. If there are more credit-constrained consumers in the economy, this will cause the marginal propensity to consume, to fall O h. If consumption-smoothing consumers become more optimistic about…
Please check the solution to (a) and (b) of the following problem for accuracy and elaborate: Given MPC (marginal propensity to consume) = 0.75, if the government implements an expansionary fiscal policy as (a) cutting taxes by $10 billion, then by how much would total spending increase over an infinite period? (b) spending $10 billion, then by how much would total spending increase over an infinite period? MPC = 0.75 Tax multiplier = (-MPC / 1) = (-0.75 / 1 – 0.75) = (-0.75 / 0.25) = -3. (a) Cutting taxes by $10 billion. The total spending increase by (-3) (-$10 billion) = $30 billion. Spending multiplier = (1/1 – MPC) = (1 / 1 – 0.75) = 1 / 0.25 = 4 (b) Spending 1ncrease by 10 billion. The total spending increase by (4) ($10 billion) = $40 billion.
7) Suggest a policy mix to achieve the following objectives: a. Increase Y while keeping i constant. b. Decrease the fiscal deficit while keeping constant. What happens to i? To investment?
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 changing taxes to reduce the burden of this recession. Fiscal Policy Price Level 140 130 120 110 100 90 80 70 60 50 LRAS $ AS AD₁ 40 0 80 160 240 320 400 480 560 640 720 800 Real GDP (billions of dollars) billion AD Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. a How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ b. If the MPC is 0.6, how much do taxes need to change to shift aggregate demand by the amount you found in part a? billion Suppose instead that the MPC is 0.92 c How much does aggregate demand and taxes need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by S billion and taxes need to change by $[ billion.

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