Question

In an open economy:

C = 400 + 0.75Yd

T = 0.2Y

I = 600

G = 1000

X = 500

Z = 0.1Y

a.Calculate national income when the economy is at equilibrium. Use the injection-leakage approach to graph your results.

b.Full employment is achieved when income is 5500. How much should government expenditure increase to achieve full employment?

c.At full employment, what is the (i) budget? (ii) trade balance?

d.Based on your answers in (c), is it advisable for government expenditure to increase to achieve full employment? Suggest a better option/ alternative.

Answer #1

d)

The result from c describes that the increase in government expenditure makes the budget to go deficit. If this is not desirable, then the government can take monetary policy to increase investment by the same amount as government expenditure. However, the effect of monetary policy on investment is not as predictable as the change in government expenditure or tax. Therefore, in this case the best policy is to change government expenditure.

3. In a three-sector economy: C = 200 + 0.75Yd T = 0.2Y I = 800
G = 1000
(a) Calculate national income when the economy is at
equilibrium. Graph your results.
(b) Full employment is achieved when income is 5500.
(i) What is the multiplier?
(ii) How much should taxes be cut to achieve full employment?
What is the budget at full employment?

C = 250 + 0.75Yd
I = 180
G = 200
T = 80
a. Find new consumption function and saving function.
b. Calculate government expenditure multiplier.
c. Calculate National Income equilibrium using approach:
i. AD = AS
ii. Leakage = Injection

An open economy is described by the following system of
macroeconomic equations, in which all
macroeconomic aggregates are measured in billions of Namibian
dollars, N$.
Y = C + I + G + X – M
C = 160 + 0.6Yd
T = 150 + 0.25Y
I = 150
G = 150
E = 300
M = 50 + 0.1Y, Yf = 1500
Where: Y is domestic income
Yd is private disposable income
C is aggregate consumption spending
T is...

In A country the consumption function is: C (Y) = 5 +
0.75 Y
The investments are I = 4;
full employment income is YV = 40.
a) How high must government expenditure be for full employment
to be achieved?
b) How high would government transfers to A-land citizens have to
be to achieve the same goal? (Note: a transfer is like a negative
tax, -T)
c) Why is it that the state expenditure is higher for b) than for...

Suppose the economy of Ansonia is described by the
following:
C=400+0.6Yd, T=600, G=800, I=500
(a) Calculate the equilibrium level of output. Graph your
solution.
(b) If the government spending increases by 200 what is the new
equilibrium level of output? Use the government spending
multiplier.
(c) If the government increases taxes by 200 what is the new
equilibrium level of output? Use the tax multiplier.
(d) If the government increases taxes and spending by 200 what
is the new equilibrium...

In a closed economy (i.e. one that does not engage in foreign
trade), spending on consumer goods is related to national income by
the following schedule:
Y (£bn)
0
200
400
600
800
1000
1200
1400
1600
1800
Cd (£bn)
40
200
360
520
680
840
1000
1160
1320
1480
J (£bn)
E (£bn)
If firms are investing at a rate of
£80bn per year and the government is spending £120bn per year:
(a)
Fill in the figures in...

Suppose the following aggregate expenditure model describes the
US economy:
C = 1 + (8/9)Yd T = (1/4)Y I = 2 G = 4 X = 3 IM = (1/3)Y where C
is consumption, Yd is disposable income, T is taxes, Y is national
income, I is investment, G is government spending, X is exports,
and IM is imports, all in trillions $US.
(a) Derive a numerical expression for aggregate expenditure (AE)
as a function of Y. Calculate the equilibrium...

Suppose that the economy is characterized by the following
equations: C = 160 + 0.9Yd I = 125 G =125 T = 100 a. Solve for GDP
(Y) (note this is a number, not a description) b. Solve for
Disposable Income (Yd) (note this is a number, not a description)
c. Given the equation for Consumption, what is the Consumption
Multiplier? (note this is a number, not a description) d. What is
the Marginal Propensity to Save? (note that this...

Suppose the economy can be modeled as follows.
C=100+.8YD I=200
G=300
T=400
a) suppose full employment income is 1,600. By how much would
the government have to change taxes to reach full employment? Graph
it!
b) What is the tax multiplier in this case?
c) Which policy, changing taxes or changing government spending
has the smaller effect on the government’s budget? Why?

Consider an open economy with the
following specifications:
C= 200 - 0.85Y
T= 300
G= 400
I = 120
X= 40
M= 30
Derive the savings function and show that . MPS + MPC =
1 [3 marks]
Define a budget deficit and state whether the government is in
a deficit or surplus.
[3
marks]
Given that the economy is open, state and explain the
components of Aggregate demand (AD).
[4
marks]
Derive the equilibrium income...

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