Question

1. Suppose the United States economy is represented by the following equations: Z= C + I + G , C = 500 + 0.5Yd, Yd = Y − T T = 600, I = 300, G = 2000, Where, Z is demand for goods and services, Yd is disposable income, T is taxes, I is investment and G is government spending. Y is income/production. (a) Assume that the economy is in equilibrium. What does it mean in terms of the relationship between income/production (Y) and demand (Z)? (b) Given the above variables, calculate the equilibrium level of output. (c) Now, assume that government spending decreases from 2000 to 1600. What is the new equilibrium level of output? How much does income change as a result of this event? (d) What is the multiplier for this economy?

2. Graphically illustrate the effects of an increase in autonomous consumption (c0) on the demand line (ZZ) and Y. Indicate the initial and final equilibrium level of output in your graph. Why this increase is greater than the initial change in autonomous consumption?

3. Suppose the consumption in an economy is represented by the following equation: C = 250 + 0.75.Yd (a) Calculate the multiplier in this economy? What is the interpretation of multiplier? (b) Calculate the propensity to save. (c) If the government in this economy increases government spending by 100, what is the effect on the total output?

Answer #1

(1)

(a)

In equilibrium, planned aggregate demand (AE) is equal to total income/production (Z), so there is zero unplanned inventory. Firms can sell all their output produced without using existing inventory.,

(b)

In equilibrium, Z = Y = C + I + G

Y = 500 + 0.5(Y - 600) + 300 + 2000

Y = 2800 + 0.5Y - 300

0.5Y = 2500

Y = 5000

(c)

When G = 1600,

Y = 500 + 0.5(Y - 600) + 300 + 1600

Y = 2400 + 0.5Y - 300

0.5Y = 2100

Y = 4200

Change in income = 4200 - 5000 = -800 (decrease)

(d)

Multiplier = Change in Y / Change in G = (4200 - 5000) / (1600 - 2000) = -800 / -400 = 2

NOTE: As per Answering Policy, 1st question is answered.

The US economy is represented by the following equations:
Z=C+I+G, C=300+.5YD, YD =Y T T =400, I =250, G=1000 Given the above
variables, calculate the equilibrium level of output. Now assume
that consumer confidence increases causing a rise in autonomous
consumption (c0) from 300 to 500. What is the new equilibrium level
of output? How much does income change as a result of this event?
What is the multiplier for this economy?

1. Suppose the United
States economy is represented by the following
equations:
Z = C + I + G
C
= 100 +
.5YD T
=
200 I
= 30
YD= Y -
T G
= 100
a) Which variables
are endogenous and which are exogenous?
b) Calculate
equilibrium levels of output, consumption and disposable
income
c) What is the
multiplier for this economy
d) What is the
effect of increasing G by $100 on Y and the deficit
2) Suppose that the wage
and price setting relations are...

1. Suppose the United
States economy is represented by the following
equations:
Z = C + I + G
C
= 100 +
.5YD T
=
200 I
= 30
YD= Y -
T G
= 100
a) Which variables
are endogenous and which are exogenous?
b) Calculate
equilibrium levels of output, consumption and disposable
income
c) What is the
multiplier for this economy
d) What is the
effect of increasing G by $100 on Y and the deficit
2) Suppose that the wage
and price setting relations are...

Suppose an economy is represented by the following
equations.
Consumption function C = 300 + 0.8Yd
Planned investment I = 400
Government spending G = 500
Exports EX = 200
Imports IM = 0.1Yd
Autonomous Taxes T = 500
Marginal Tax Rate t=0.25
Planned aggregate expenditure AE = C + I + G + (EX - IM)
By using the above information calculate the equilibrium level of
income for this economy and explain how multiplier changes when we
have an...

. Suppose an economy is represented by the following
equations.
Consumption function C = 200 + 0.8Yd
Planned investment I = 400
Government spending G = 600
Exports EX = 200
Imports IM = 0.1Yd
Autonomous Taxes T = 500
Marginal Tax Rate t=0.2
Planned aggregate expenditure AE = C + I + G + (EX - IM)
By using the above information calculate the equilibrium level
of income for this economy and explain why fiscal policy becomes
less effective...

. Suppose an economy is represented by the following
equations.
Consumption
function
C = 200 + 0.8Yd
Planned
investment
I = 400
Government
spending
G = 600
Exports
EX = 200
Imports
IM = 0.1Yd
Autonomous
Taxes
T = 500
Marginal Tax
Rate
t=0.2
Planned aggregate
expenditure AE = C
+ I + G + (EX - IM)
By using the above information calculate the equilibrium level
of income for this economy and explain why fiscal policy becomes
less effective...

Suppose that the economy is characterized by the consumption
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the equilibrium consumption/output ratio is C/Y = 0.9
the autonomous spending is 170.
equilibrium output is Y = 200
the government budget is balanced

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C = c0+ c1YD
YD= Y – T
I = b0+ b1Y
G = G (autonomous)
T = T (autonomous)
Suppose that consumers decide to consume less (and therefore
save more) for any given amount of disposable income. Specifically,
assume that consumer confidence (c1)falls. What will
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12
The average tax rate t = 25%
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The level of government spending G = 14
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Calculate the equilibrium level of income and output in the
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Calculate the expenditure multiplier and show the effect
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Y = C + I + G
C = c0+ c1.YD
YD= Y – T
T = t1.Y – t0
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c0> 0,
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Is the following statement true? “An increase in the marginal
income tax rate t1leads to a reduction of the
primary deficit of the government (=G – T)”
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