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ECON1132 Chapter Notes - Chapter 5: Aggregate Demand, Parthiv Patel

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School
Boston College
Department
Economics
Course
ECON1132
Professor
Richard Tresch

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Document Summary

Problem set #5: p. 304-305; questions 3, 5, 6 & 7, mspending = 1/(1-mpc) x 10 = - change in national income: a. mtransfers = mpc/(1-mpc) x 3 = change in national income b. If the transfers are financed by an equal amount of taxes then the multiplier would be 0 and there would be no effect on national income: mspending = 1/(1-mpc) billion x 3 = - billion change in national income (change in taxes) * mtaxes = - billion. Mtaxes = -. 66/(1-. 66) = -2 (change in taxes) * -2 = - billion. The government must increase taxes by billion to keep the economy at the full employment level of national income: a. recessionary gap, required change in ye/mspending. /5 = = size of the gap: two fiscal policies that would close the gap are increase in government spending and cutting taxes.

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Related Questions

Economics

Unit 9: Keynesian Economics - Multipliers

Name _______________________________________________________

Answer the following problems. Show ALL work for every problem.

Keep in mind the equations you learned:

Change in G x SM = Change in AE

Also recall that if you know how much AE must change by AND you know the SM, you can solve for how much G must change by.

1. MPC = .9 AE must increase by $350 billion to reach the full employment level of RGDP. Solve for the change in Government spending required to accomplish this. 2. MPC = .9 AE must decrease by $250 billion to eliminate an inflationary gap. Solve for the change in Government spending required to accomplish this. 3. MPS = .15 AE must increase by $700 million to eliminate a recessionary gap. Solve for the change in Government spending required to accomplish this. 4. MPC = .8 Government spending increases by $500 million. How much does AE increase by? 5. A recessionary gap of $18 billion exists. The SM = 4. How much must Government Spending increase by? 6. An inflationary gap exists of $20 billion. The SM = 4. How much must Government Spending DECREASE by? 7. The MPC is .75. AE must increase by $100 million. How much must Government Spending increase by?

Instead of increasing Government Spending, Congress has chosen to decrease tax rates. Use the tax multiplier (TM) to solve the following.

Change in Taxes x TM = Change in AE

8. The MPC is .75. AE must increase by $100 million. How much should the tax decrease be?

9. The MPS is .1. AE must decrease by $80 million to reduce inflation. How much should the tax INCREASE be?

10. Suppose the government wishes to eliminate an inflationary gap of $100 billion and the MPC is .60. How much must the government increase taxes by?

GDP C Ig G X M
300 250 40 20 30 10
350 290 40 20 30 10
400 330 40 20 30 10
450 370 40 20 30 10
500 410 40 20 30 10
550 450 40 20 30 10
600 490 40 20 30 10
650 530 40 20 30 10

a). Calculate the MPC, MPS, and the multiplier

b). If full employment GDP is 600:

1). Is there an inflationary gap or a recessionary gap?

2).How much would government spending need to change to bring about the necessary change to return the economy to full employment equilibrium?

3).Alternatively, to a change in G, how much would taxes have to change to bring about the necessary change in to return the economy to full employment equilibrium?

c).If full employment GDP is 350:

1).Is there an inflationary gap or recessionary gap?

2).How much would spending need to change to bring about the necessary change to return the economy to full employment equilibrium?

Data for 9-4 Homework: Problem Set

GDP

Taxes

DI

C

I

G

C+I+G

1250

200

800

300

200

1500

200

1000

300

200

1750

200

1200

300

200

2000

200

1400

300

200

2250

200

1600

300

200

2500

200

1800

300

200

2750

200

2000

300

200

This table represents several different potential output scenarios for a hypothetical economy. Based on the information presented, complete the following:

1. Calculate the Disposable Income (DI) at each level of GDP.
2. Calculate total spending (C+I+G) at each level of GDP.
3. What is the equilibrium level of GDP in the economy?
4. When the economy is at equilibrium, what is the level of saving?
5. What is the value of the MPC?
6. What is the value of the expenditure multiplier?
7. What is the value of the tax multiplier?
8. If the government increases spending by $100, what would be the new equilibrium value of GDP?
9. If the government wanted to achieve the same change in GDP as in part 8 by cutting taxes instead of increasing spending, how large would the tax cut need to be?