Use the following equations for exercises 16–18. C = $100 + .8Y I = $200 G = $250 X = $100 – .2Y 16. What is the equilibrium level of real GDP? 17. What is the new equilibrium level of real GDP if government spending increases by S150? 18. What is the new equilibrium level of real GDP if government spending and taxes both increase by $150?
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- G Spending and NTR Budget Deficit Budget Surplus Y1 V1 . I I Y2 V2 je I I Y3 I V3 G NTR Real GDP BL Real GDP In the following graph, NTR is net tax revenue, G is government spending on goods and services, BL is budget line. Which of the following is true? A balanced budget would occur at income level Y1 A balanced budget would occur at income level Y2 A balanced budget could occur at income levels Y1, Y2 or Y3 The existence of a balanced budget cannot be determined because no inflation on tex revenues is given1.) If the MPC is 0.8 and taxes increase by $100 billion, what is the effect on equilibrium RGDP? equilibrium RGDP will fall by $80 billion equilibrium RGDP will fall by $125 billion equilibrium RGDP will fall by $400 billion equilibrium RGDP will fall by $500 billion 2.) If equilibrium RGDP is $10000 billion and full employment GDP is $9000 billion, and the MPC = 0.75, what is the appropriate fiscal policy to return the economy to full employment GDP reduce taxes by $250 billion reduce taxes by $333.33 billion raise taxes by $250 billion raise taxes by $333.33 billioncan you explain this a little more for me? its a practice quiz. i provided the prof's answer and mild explanation of the correct answer, but I still dont understand it. 13. If government spending is increased by $5, and this increase in spending is financed by a tax increase in the same amount, the effect on equilibrium would be: A). zero – the balance each other out. B) an increase in equilibrium of $10. C) a decrease in equilibrium of $5. D) an increase in equilibrium of $5. This is his answer: 13. d (compare fiscal policy options #1 and #2 shown above and use $5 for both ∆G and ∆Tx;use any MPC, for example .90) i dont understand how to math it. Can you show me how?
- 8. Changes in taxes 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. PRICE LEVEL 130 120 110 100 8 90 80 70 0 10 20 30 OUTPUT Aggregate Demand 40 50 60 Aggregate Demand ? Suppose the governments of two very similar economies, economy Y and economy Z, implement a permanent tax cut of equal size. Investment spending in economy Y is more sensitive to changes in the interest rate than investment spending in economy Z. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with the4. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. 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 increase government purchases by $400 billion. The increase In government purchases will lead to an increase in income, generating an initial change in consumption equal to This increases income yet again, causing a second change in consumption equal to . The total change in demand resulting from the initial change in government spending Is The following graph shows the aggregate demand curve (AD¡) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out."…1. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.60 of each additional dollar they earn and save the remaining $0.40. The marginal propensity to consume (MPC) for this economy is 0.6 v , and the expenditure multiplier for this economy is v Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to v. This increases income yet again, causing a second change in consumption equal to The total change in demand resulting from the initial change in government spending is
- 2. Assume a given economy has an equilibrium GDP of $360 billion. A. If government spending and taxes both increase by $40 billion, determine the new equilibrium GDP. B. If both G and taxes increase by $40 billion, what impact will these two changes happening at the same time have on the budget? In other words, will these two changes cause a surplus, a deficit, or a balanced budget? C. Solve for the numerical value of the balanced budget multiplier.4. The multiplier effect of a change in government purchases Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is 0.8, and the spending multiplier for this economy is 5. 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 -$2,000 billion. 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 The following graph shows the aggregate demand curve (AD) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the multiplier effect takes place. For simplicity, assume that…1. The multiplier effect of a change in government purchases Consider a hypothetical closed economy in which households spend $0.80 of each additional dollar they earn and save the remaining $0.20. The marginal propensity to consume (MPC) for this economy is 0.8 Suppose the government in this economy decides to increase government purchases by $400 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to $320 billion . This increases income yet again, causing a second change in consumption equal to $256 billion $2 trillion ($2,000 billion) The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate demand curve (AD,) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate demand curve (AD₂) after the spending multiplier effect takes place. Hint: Be sure that the new aggregate…
- 2. Fiscal policy Suppose a hypothetical economy is currently in a situation of deficient aggregate demand of $64 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should be used. Economist A believes that the government spending multiplier is 8 and the tax multiplier is 4. Economist B believes that the government spending multiplier is 4 and the tax multiplier is 2. Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for each scenario, compute the size of the tax cut that would achieve this same effect. Policy Options for Closing Output Gap Increase in Spending Tax Cut (Billions of dollars) Spending Multiplier (Billions of dollars) Tax Multiplier 4 Economist A 8 Economist B 4 2 Economist C favors increases in government spending over tax cuts. This means that Economist C…5. Fiscal policy, the money market, and aggregate demand Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they over. The following graph plots the economy's initial aggregate demand curve (AD1). Suppose now that the government increases its purchases by $2.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD₂) after the multiplier effect takes pla Hint: Be sure the new aggregate demand curve (AD2) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following gra (?) PRICE LEVEL 116 114 112 110 108 106 104 102 100 100 12 AD₁ 10 102 104 106 108 110 112 OUTPUT (Billions of dollars) 114 116 Money Supply Į þ The following graph plots equilibrium in the money market at an interest rate of 6% and a quantity of money equal to $15 billion. AD2 Show the impact of the increase in government purchases on the interest rate by shifting one or…Suppose the MPC is 34 and the government wants to increase output by $2000. 1. How much should government spending increase? 2. How much should taxes decrease? (You can leave your answer as a fraction) 3. Describe the intuition behind why these two values are different 4. Suppose instead the government wants to decrease output by $ 2000. By how much should they raise taxes?