Question

Consider an economy described by the following equations​ (same equations as previous​ exercise):

Y​ = C​ + I​ + G,

G​ = 2,000

T​ = 2,000

C​ = 250​ + 0.75YD

I​ = 750

​a) Calculate the expenditure multiplier.

A.

​-1.33

B.

1.33

C.

​-4

D.

4

E.

3

F.

​-3

​b) Calculate the change in Y and the new level of Y if G increases by​ $400.

Change in Y​ =	New level of Y​ =
A. ​-1200 B. ​-400 C. ​+1600 D. ​-1600 E. ​+400 F. ​+1200	A. ​$5600 Billion B. ​$4800 Billion C. ​$4400 Billion D. ​$6400 Billion E. ​$7600 Billion F. ​$7200 Billion

https://i.imgur.com/Ei2pgrx.png

​c) After G increased by​ $400, does the government have a budget​ deficit, a budget surplus or​ neither?

The government has a	If​ applicable, what is the amount of the budget deficit or​ surplus?
A. Budget surplus B. Budget deficit                 C. Balanced Budget	A. ​+400 B. ​-1600 C. ​+1600 D. ​+1200 E. ​-400 F. ​-1200 G. Not Applicable

​d) Calculate the change in Y and the new level of Y if T increases by​ $400 (G remains at its original value

of​ $2000).

Change in Y​ =	New level of Y​ =
A. ​+1200 B. ​-1200 C. ​+400 D. ​+1600 E. ​-1600 F. ​-400	A. ​$7200 Billion B. ​$6400 Billion C. ​$7600 Billion D. ​$4400 Billion E. ​$5600 Billion F. ​$4800 Billion

​e) Calculate the change in Y and the new level of Y if both G and T increase by​ $400 (from their original

​levels).

Change in Y​ =	New level of Y​ =
A. ​+1600 B. ​-400 C. ​-1600 D. ​-1200 E. ​+1200 F. ​+400	A. ​$5600 Billion B. ​$7200 Billion C. ​$6400 Billion D. ​$4400 Billion E. ​$7600 Billion F. ​$4800 Billion

Answer 1

a. Option D.

Expenditure Multiplier = 1/ 1-MPC = 1/ 1-0.75 = 1/0.25 = 4.

b. Option C, Option E

Change in Y = Expenditure Multiplier * Change in G = 4 * $400 = $1600

Initial Y = 250​ + 0.75(Y - 2000) + 750 + 2000 = $6000.

New Y = $6000 + $1600 = $7600 billion

c. Option B, Option A.

New G = 2400, Tax = 2000

Since Government expenditure exceeds revenue, the budget is in deficit. Amount of deficit = 2400 - 2000 = 400

d. Option B, Option F.

Change in Y = Tax Multiplier * Chage in taxes = MPC / 1 - MPC * $400

= .75 / .25 * $400 = -$1200.

New Y = 6000 - 1200 = $4800 billion

e. This is the case of balanced budget where change in income = change in government expenditure

Option F, Option C.

Change in Y = $400 billion

New Y = $6400 billion.