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5. Suppose that there is no private investment, no government sector, no international trade in an economy. The aggregate demand is equal to total consumption demand. If the autonomous part of consumption (is 30 and the marginal propensity to consume (is 0.8, what is the multiplier? Explain the derivation procedure and the final equilibrium output equation showing the multiplier.

6. Suppose that there is no government sector and no international trade in the economy. If the autonomous part of consumption (is 30, the marginal propensity to consume (is 0.8, and the given private investment is 60, what is the multiplier? Show the derivation procedure and the final equilibrium output equation with multiplier.

7. Suppose that the government imposes a lump sum tax, T, on the income. If the consumption demand is described by where and the private investment is given as , what is the multiplier. Derive the equilibrium output equation that shows the multiplier.

For questions from 8 to 12, suppose that the economy (that is not engaged in international trades) is characterized by the following behavioral equations:

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Related questions

Assume the following values of an economy.

Planned Investment (Ip) = $20

Autonomous Consumption (C ) = $30

Marginal Propensity to consume (MPC) = .9

a. What is the equilibrium income?

b. What is the value of saving at equilibrium?

c. Does the saving and Investment Identity hold true at equilibrium income OR GDP?

2. In addition to the values given in question (1) above, assume the government increases its spending by $30 without raising taxes. The government can do this by borrowing from the private sector.

a. Based on this information calculate the new level of equilibrium income.

b. Calculate the total value of consumption at equilibrium.

c. Calculate the total value of saving at equilibrium.

3. In addition to questions in (1 & 2) above, assume the government decides to raise autonomous taxes by $30 to balance its budget.

a. What is the new value of equilibrium income?

b. What is the value of the autonomous tax multiplier?

c. What is the value of autonomous spending multiplier?

4. In addition to the value in questions (1, 2 & 3), assume the following values.

Autonomous export (Xa) = $30

Autonomous import (Ma) = $10

Marginal propensity to import = 0.1

a. What is the new value of equilibrium income?

b. What is the value of total consumption of domestically produced good at equilibrium?

c. What is the value of the trade surplus or deficit at equilibrium?

d. What is the value of the marginal propensity to consume domestically produced goods?

e. What is the value of capital inflow or outflow

1. Suppose the multiplier in a given economy is 2.5. If government spending increases by 10, how much will GDP increase by?

10 * 2.5 = 25

2. Again, suppose the multiplier is 2.5. If investment spending falls by 4, what will be the change in GDP?

- Invetment spending falls by 4 --> - 4

2.5 * - 4 = - 10

3. Again, suppose that the multiplier for a given economy is 2.5. The authorities believe that GDP is currently below potential, and would like it to increase by 5. How much should they raise government spending to bring this about?

2. 5 * ___ = 5 ---> 5/2 = 2

Government spending should raise to 2

4. Suppose the marginal propensity to consume in an economy is equal to 0.75. What is the marginal propensity to save?

mpc = 0.75

marginal propensity to save = 1 - 0.75 = 0.25

5. Again, suppose the marginal propensity to consume is 0.75. If GDP increases by 20, what is the change in consumption?

mpc = 0.75

GDP (Y) = 20

C = 0 + 0.75 * 20 = 15

6. Suppose the marginal propensity to consume in an economy is equal to 0.75. If there were no taxes and no foreign trade, what would the multiplier be?

mpc = 0.75

1 - 0.75 = 0.25

0.25 —> 1/4

1 / 1/4 = 4/1 = 4

multiplier = 4

* I would like to know if my answers are correct and if I used the correct formulas to find the answers. Thank you.

13. Solve the equilibrium output equation that shows the multiplier, using general notations given above.

14. What is the multiplier in the above equation? Does the economy respond more to changes in autonomous spending when t1 is 0 or when t1 is positive? Explain.

15. Why is this marginal tax regime called an automatic stabilizer?

Part III: Aggregate demand and equilibrium output determination in an open economy model.

16. Consider the following behavioral equations for an economy that engages in international trade. Derive the equation to show the equilibrium output with the multiplier.

 

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