**Stimulating Aggregate Demand through Fiscal Policy: An Exercise in Economic Multipliers**In this exercise, we explore the impact of fiscal policy on aggregate demand (AD) within an economy. The consumption function provided is:\[ C = \$700 \text{ billion} + 0.8Y \]Here, $C$ represents consumption, and $Y$ represents national income.The government aims to stimulate the economy. We will determine the initial effect on aggregate demand at current prices (before accounting for the multiplier effect) based on three different fiscal policy actions:**Instructions:** Enter your responses as whole numbers.### Questions:**a. What is the initial shift in aggregate demand due to a $30 billion increase in government purchases?**\[ \_\_\_\_\_\_ \text{ billion} \]**b. What is the initial shift in aggregate demand due to a $30 billion tax cut?**\[ \_\_\_\_\_\_ \text{ billion} \]**c. What is the initial shift in aggregate demand due to a $30 billion increase in income transfers?**\[ \_\_\_\_\_\_ \text{ billion} \]We will now account for the cumulative shift in aggregate demand after considering the multiplier effect for each of these fiscal actions:**d. What will be the cumulative AD shift (after multiplier effects) due to the increased government spending?**\[ \_\_\_\_\_\_ \text{ billion} \]**e. What will be the cumulative AD shift (after multiplier effects) due to the tax cut?**\[ \_\_\_\_\_\_ \text{ billion} \]**f. What will be the cumulative AD shift (after multiplier effects) due to the increased transfers?**\[ \_\_\_\_\_\_ \text{ billion} \]By carrying out these calculations, students will learn how initial changes in fiscal policy can have multiplier effects that lead to larger shifts in aggregate demand. This exercise underscores the importance of understanding fiscal multipliers when crafting economic policy.

Aggregate expenditure: aggregate expenditure is the sum of consumption expenditure, investment…

Suppose the consumption function is C-$700 billion+0.8Y 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 responses as a whole number. a a $30 billion increase in government purchases? billion b. a $30 billion tax cut? billion c. a $30 billion increase in income transfers? billion What will the cumulative AD shift (after multiplier effects) be for d. the increased government spending? $ e the tax cut? billion billion f the increased transfers? billion

Suppose the consumption function is C-$700 billion+0.8Y 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 responses as a whole number. a a $30 billion increase in government purchases? billion b. a $30 billion tax cut? billion c. a $30 billion increase in income transfers? billion What will the cumulative AD shift (after multiplier effects) be for d. the increased government spending? $ e the tax cut? billion billion f the increased transfers? billion

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. Suppose you are given the following fixed-price Keynesian model: C=280 + 0.9Y. I-200 G=100 X3D200 M= 100 + 0.1Y. T= 100 a. Find the aggregate expenditure function. b. Find the equilibrium level of real GDP. C. What is the spending multiolier in this model? Tax multiplier? d. Show that leakages injections at equilibrium. e. If taxes increase by $100, what is the new equilibrium level of GDP? E. Show your answers to b) and e) graphically.
Suppose the consumption function is C=$800 billion + 0.8 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 responses as a whole number. a. a $100 billion increase in government purchases? $ billion b. a $100 billion tax cut? billion c. a $100 billion increase in income transfers? billion What will the cumulative AD shift (after multiplier effects) be for d. the increased government spending? billion e. the tax cut? billion f. the increased transfers? billion
YAS 1548 + 19P - 12Poil YAD = 412 – 33P+ 26G %3D Suppose initially, the Poil = $86 per barrel and government spending is equal to $780. Part (a): Calculate equilibrium GDP and the price level. Part (b): Determine the magnitude of the simple multiplier if oil prices exogenously rise by $1. Part (c): Determine the magnitude of the simple multiplier if government spending exogenously increases by $1.
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YAS = 742 + 15 P- 28Poil YAD = 478 - 45P + 18G Suppose initially, the Poil = $93 per barrel and government spending is equal to $630. %3D Part (a): Calculate equilibrium GDP and the price level. Part (b): Determine the magnitude of the multiplier if oil prices exogenously rise by $1. Part (c): Using 2 to 3 sentences, provide a theoretical explanation for why the multiplier you calculated in part (b) is smaller (in absolute value) than the simple multiplier. Hint: you should be mentioning how the price level impacts AE and AD variables. Part (d): Determine the magnitude of the multiplier if government spending exogenously increases by $1. Part (e): Using 2 to 3 sentences, provide a theoretical explanation for why the multiplier you calculated in part (d) is smaller than the simple multiplier. Hint: you should be mentioning how the price level impacts AE and AD variables.
A decrease in government purchases of $6 billion leads to an initial $4.5 billion decrease in withdrawals. a. In this case MPW is, MPC is, and the spending multiplier in this economy is Enter your responses for marginal propensities and multiplier values rounded to 2 decimal places. b. With this change in government purchases the AD curve shifts to the by $billion. Enter your response for the size of the curve shift rounded to 1 decimal place. Do not put a minus sign in your answer. c. As a result of this shift the equilibrium price level will (Click to select) vv and equilibrium real output will C A decrease in government purchases of $6 billion leads to an initial $4.5 billion decrease in withdrawals. MPC is a. In this case MPW is , and the spending multiplier in this economy is propensities and multiplier values rounded to 2 decimal places. Enter your responses for marginal b. With this change in government purchases the AD curve shifts to the (Click to select) by $ of the curve…
Aggregate Expenditures and Multipliers Assignment a. Using the aggregate expenditure function above, what is the current level of real GDP? b. Using the aggregate expenditure function above, what would be the level of real GDP if the aggregate expenditure function shifted up by $0.2T? c. If Investment expenditures increase by $300B and MPC is equal to 0.90, what will be the increase in real GDP? d. If Government expenditures increase by $800B and MPS is equal to 0.05, what will be the increase in real GDP?
2. For simplicity, we normally treat aggregate tax payments (T) as determined by politics or other factors unrelated to output. However, suppose that aggregate tax payments are proportional to income. That is, T=t·Y, where tis the marginal tax rate and is between o and 1. a. How, if at all, would this change in our assumptions affect the Keynesian cross diagram? b. Would this change increase, decrease, or have no impact on the multiplier effect, or is it not possible to tell? (That is, how would the effect of a given vertical shift of the planned expenditure line compare with what it was before?)
Suppose the consumption function is $800 billion +0.8y and the government wants to stimulate the economy. By how much will aggregate demand at current prices shift initially (before multiplier effects) with: a. A $50 billion increase in government purchases b. A $50 billion tax cut c. A $50 increase from income transfers what will the cumulative ad shift be for: d. The increased government spending e. The tat cut f. The increased transfers
Is the relationship between changes in spending and changes in real GDP in the multiplier effect a direction (positive) relationship or is it an inverse (negative) relation- ship?
At an intial point on the aggregate demand curve, the price level is 100, the real GDP is $18 trillion. After the price level rises to 110, however there is an upward movement along the aggregate demand curve, and real GDP declines to $14 trillion. If total planned spending declines by $200 billion in response to the increase in the price level, what is the MPC in this economy?