We use the following terminology in this part: aggregate income Y and disposable income Ya (= Y –T), consumption function C(Ya), planned investment function I(r), government spending G, and taxation T = tY where t is the marginal tax rate; r% denotes the real interest rate in the economy. (Note, r is in percentage points, e.g. r = 2 means the interest rate is 2%. When doing calculations, the interest rate should not simply be inserted in decimal form. For example, if r = 2 then I(2) = 124 – 2 = 122.) Consider a hypothetical economy where: • (Ya) = 12 + 0.75 × (Y – T) • I(r) = 124 – 1 × r • G = 120 • t = 20%
We use the following terminology in this part: aggregate income Y and disposable income Ya (= Y –T), consumption function C(Ya), planned investment function I(r), government spending G, and taxation T = tY where t is the marginal tax rate; r% denotes the real interest rate in the economy. (Note, r is in percentage points, e.g. r = 2 means the interest rate is 2%. When doing calculations, the interest rate should not simply be inserted in decimal form. For example, if r = 2 then I(2) = 124 – 2 = 122.) Consider a hypothetical economy where: • (Ya) = 12 + 0.75 × (Y – T) • I(r) = 124 – 1 × r • G = 120 • t = 20%
Chapter11: Fiscal Policy
Section: Chapter Questions
Problem 7SQ
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first image is just the resource. second image has the questions 6,7 and 8
* also note This economy’s central bank follows a
given
level.

Transcribed Image Text:6. Suppose that the price level (P) falls to 500. What is the equilibrium value of
aggregate income, Y?
7. What are the new equilibrium values of the interest rate, r, and investment, I?
8. Discuss why the change in the price level has the identified impacts on Y, r and I.

Transcribed Image Text:We use the following terminology in this part: aggregate income Y and disposable income
Ya (= Y –T), consumption function C(Ya), planned investment function I(r), government
spending G, and taxation T = tY where t is the marginal tax rate; r% denotes the real
interest rate in the economy. (Note, r is in percentage points, e.g. r = 2 means the interest
rate is 2%. When doing calculations, the interest rate should not simply be inserted in
decimal form. For example, if r = 2 then I(2) = 124 – 2 = 122.)
Consider a hypothetical economy where:
• C(Ya) = 12 + 0.75 × (Y – T)
• I(r) = 124 – 1 × r
• G = 120
• t = 20%
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