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- 24. Which of the following is used as a remedial measure during a recession in an economy? a.Decrease taxes and increase government spending b.Increase taxes and government spending c.Decrease taxes and government spending d.Increase taxes and decrease government spending3. Suppose an economy had aggregate demand components with the following relationships: Consumption Spending, C-140 +0.60*(DY) Investment Spending, I-25 +0.15"Y Government Spending, G-0 Net Export Spending, X=0 Tax Collections, Tx = 0 a. What is the equilibrium income for this economy (Show your work)? b. If the Government decided to Increase G spending by 6, what would be the new equilibrium income for this economy (Show your work)? Page 2 bed tooing c. If instead the Government decided to Reduce Tx (taxes) by 10 (i.e., send checks to people), what would be the new equilibrium income for this economy (Show your work)? d. If instead the Government decided to Increase G spending and Increase Tx (taxes) by 20, what would be the new equilibrium income for this economy (Show your work)?1. The government expenditure multiplier is the effect of a change in government expenditure (G) on goods and services: a. An increase in aggregate expenditure increases aggregate demand (AD), which increases real GDP, which induces an increase in consumption expenditure (C), and which further increases aggregate demand (AD). b. An increase in aggregate expenditure increases aggregate supply (AS), which increases real GDP, which induces an increase in consumption expenditure (C), and which further increases aggregate supply (AS). c. An increase in aggregate expenditure decreases aggregate demand (AD), which decreases real GDP, which induces an decrease in consumption expenditure (C), and which further decreases aggregate demand (AD). d. An increase in aggregate expenditure decreases aggregate supply (AS), which decreases real GDP, which induces an decrease in consumption expenditure (C), and which further decreases aggregate supply (AS). 2. How do banks create money? Group of…
- 52)Consider the following consumption function: C = 800 + 0.75 YD for the fictitious economy of Zapland. If the government increases taxes by $200 million, what is the change in GDP? Assume that there is no increase in the price level. Select one: a. -$800 million b. $600 million c. $800 million d. -$600 million e. -$300 million1. Suppose that the U.S. government increases its expenditure on highways and bridges by $100 billion. Explain the effect that this expenditure would have on aggregate demand and real GDP.4. In the economy of St. Maynard Island, autonomous consumption expenditure is $185 million, and the marginal propensity to consume is 0.75. Investment is $150 million, government expenditure is $100 million, and net taxes are $80 million. Investment, government expenditure, and taxes are constant - they do not vary with income. The island does not trade with the rest of the world. a) What is the consumption function? b) What is the aggregate expenditure function? c) What is the island's autonomous aggregate expenditure? d) What is the size of the multiplier in St. Maynard Island's economy? e) What is the island's aggregate planned expenditure and what is happening to inventories when real GDP is $1,100 million? f) What is the economy's equilibrium aggregate expenditure?
- 4. Suppose an economy had aggregate demand components with the following relationships: Consumption Spending, C=195+0.80° (DY) Investment Spending, I-25 +0.10°Y Government Spending, G-6+0.15*Y Net Export Spending, X-14-0.05*Y Tax Collections, Tx = -20+0.25*Y a. What is the equilibrium income for this economy (Show your work)? b. At the equilibrium income, what is the size of the government surplus (or deficit)? den Cal Page 3 601 c. If the Government decided to Increase G spending by 15, what would be the new equilibrium income for this economy (Show your work)? d. If instead the Government decided to Reduce Tx (taxes) by 6, what would be the new equilibrium income for this economy (Show your work)? yanoM e. If instead the Government decided to Increase G spending and Increase Tx (taxes) both by 30, what would be the new equilibrium income for this economy (Show your work)?3@ An economy has neither imports nor income taxes. The MPC is 0.75 and the real GDP is $120 billion. The government increases expenditures by $4 billion. The multiplier is _____ and the change in real GDP from the increase in government expenditures is _____ billion.7. Deriving and exploring the total expenditures curve The following graph shows total production (TP) and the level of Natural Real GDP (NRGDP) for a hypothetical economy. When Real GDP is $450 billion, consumption is $375 billion, government purchases are $30 billion, and investment is $70 billion. When Real GDP is $500 billion, consumption is $400 billion, government purchases are $30 billion, and investment is $70 billion. Use the blue line (circle symbol) to plot the economy's total expenditure function within a simplified Keynesian framework. TOTAL EXPENDITURE (Billions of dollars) 600 575 550 525 500 475 450 425 400 400 TP O 425 X NRGDP O 450 475 500 525 REAL GDP (Billions of dollars) 550 575 600 TE (?
- 2. Consider an economy where aggregate demand AD consists of aggregate con- 1000 and government = sumption C 10+ 0.8Y, aggregate investment I spending G = 800. (a) = (c) (d) What is aggregate demand if aggregate income/output is 10,000? Why is the economy not in equilibrium in that state? Calculate the goods market equilibrium for this economy. (b) Assume that the government increases spending by 20%. Calculate the new goods market equilibrium. What is the multiplier for the change in government spending? Assume now that the country starts trading globally and has Exports and Imports. Assume that imports are given by Im = n Y, with n being the marginal propensity to import. (e) Explain why - with exports and imports - a increase in government spending (e.g., 20%) results in a smaller change in aggregate demand/income in equilibrium than without exports and imports. (You do not have to calculate the new equilibrium.)1.) 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 billionFigure 3-3 45° Planned Expenditure 200 + 0.75Y 45 Income (Y) In the figure above: a. Find the equilibrium GDP. What happens to the left of that equilibrium? What happens to the right? b. When income is $1,000, what is the unplanned inventory? c. What is the GDP multiplier? d. What is the tax multiplier? e. How much should government expenditures increase if the government wants to increase GDP from the equilibrium level found at point a) to 1,000? f. How much should taxes decrease if the government wants to increase GDP from the equilibrium level found at point a) to 1,000? Planned Expenditure