EC140 Lecture Notes - Lecture 5: Consumption Function, Expenditure Function

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20 Jan 2017

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Governments have two functions in the model. Purchase goods and services, g, - this is assumed to be autonomous with respect to income. Net tax revenues are taxes collected minus transfer payments. Constant net tax rate in the model: If t g > 0, we have a surplus. If t g < 0, we have a deficit. Federal structure in canada implies multiple levels of government. Model assumes all levels of government included in t and g. Exports are determined by foreign households and firms. Exports, x, are autonomous with respect to canadian income. As incomes rise, total imports will rise. Net exports are exports minus imports or: As people get richer, they buy more and more goods. Trade deficit: net exports are negative (importing more than exporting) Various factors will lead to shifts in the net export function. Increase in foreign income - shift x up. Decrease in foreign income - shift x down.

Related Questions

The Modified Keynesian Model

Y = C + I + G + X â IM â¦ equilibrium condition in a 4-sector model where:

C = 150 + 0.9DI â¦ consumption function

I = 50 â¦ autonomous investment

G = 100 â¦ autonomous government spending

X = 200 â¦ autonomous exports

IM = 100 â¦ autonomous imports

And also:

DI = Y â T + Tr T = 0 â¦ autonomous taxes

Tr = 0 â¦ autonomous transfer payments

YF = 5000 â¦ full-employment Y

1. Solve for the equilibrium level of real output/income (Y*) in this economy.

2. Given the model above, net exports equal $________. Does this represent a trade deficit or trade surplus?

3. Given the model above, the federal budget has a (deficit/surplus) equal to $________.

4. What is the value of the MPC? â¦ the value of the MPS?

5. Calculate the âoversimplifiedâ expenditure multiplier.

6. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap?

7. (Refer to question â6â.) How much is the gap equal to?

8. Suppose the government chooses to eliminate the gap by using expansionary fiscal policy (i.e., increasing G). Given the numbers above, by how much would government spending (G) need to increase to achieve the goal of full-employment?

9. Suppose instead that the government decided to lower taxes to eliminate the output gap in question â6â. How much would taxes need to fall to achieve the goal of full-employment?

10. Which action (raising G or lowering T) has the largest effect on the federal budget deficit and the national debt?

11. Suppose the national debt equaled $6000 before the tax cut (refer to question â9â). What would be the value of the national debt after this policy action?

azurellama883

Assume that the equations below describe the expenditures within a particular macroeconomy and that these equations conform to the assumptions we've made in the lecture regarding the fixed price level Aggregate Expenditure model. All values for expenditure and income are dollar amounts, but for simplicity, we've dropped the $ below.

C = 0.8(DI) + 1000	C = Consumption expenditure, DI = Disposable Income
I = 2000	I = Investment expenditure
G = 1000	G = government expenditure
X = 1600	X = spending on exports
M = 1800	M = spending on imports
DI = Y - T	Y = real GDP, T = tax revenues/>
T = 1000
Yp = 12000	Yp = Potential GDP

Given the equations above, we can describe the GDP, government budget, and net exports in this economy. Select three characteristics from the list below which accurately describe this economy. Note that there is no partial credit on this question. I.e., your answer will either be all correct, or all wrong.

	a.	inflationary gap
	b.	recessionary gap
	c.	no output gap
	d.	government budget surplus
	e.	government budget deficit
	f.	balanced government budget
	g.	trade deficit
	h.	trade surplus
	i.	net exports of zero

pucearmadillo585

1. Fill in the missing information wherever there is a question mark.

2. Consumption is $6 trillion, investment is $2 trillion and government purchases are $2.5 trillion. The country exports $1 trillion and imports $1.5 trillion. Find net exports and solve the level of aggregate demand.

3. Answer True or False for each of the following

In the real world, government spending is independent of income levels.

Most Americans actually pay more to Social Security/Medicare than income taxes.

Excise taxes are proportional because everyone pays the same amount.

Tax rates in the US are higher than is usual among developed countries.

Progressive taxes are based on the ability to pay principle.

In an open economy aggregate demand or aggregate expenditures is C + I + G.

A trade deficit lowers the demand for a country's goods.

The US has not run a trade surplus for over 20 years.

The US is the world's largest exporter but not the world's largest importer.

Trade makes up a larger percentage of the US economy than a couple of generations ago.

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EC140 Lecture Notes - Lecture 5: Consumption Function, Expenditure Function

EC140 Full Course Notes

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