ECN 101 Lecture Notes - Lecture 2: Demand Curve, Aggregate Supply, Government Spending

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22 Dec 2020

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Government spending (g) on goods and services contributes directly to aggregate demand. The government withdraws money from the circular flow through taxes. Since there is no automatic reason why government spending should vary with the level of national income, g is simply fixed by the government. Let i = 300 , c = 0. 7yd and g = 200. If the assumption is that there are no taxes, then y = yd. Net taxes (nt) = direct taxes transfer benefits. Net taxes reduce personal disposable income yd such that; Therefore yd = y nt = y ty = y (1 - t) C = 0. 7yd = 0. 7 i. e the induced consumption that is dependent on national income. Increasing national income by 1 consumption demand increases by only 0. 7(1-t), if t=0. 2 and (1: = 0. 8, then consumption demand increases only by 0. 7 x 0. 8 = 0. 56. The consumption function will then appear as follows;

Related Questions

On the planet Omicron Persei 8, government spending is $1000, net taxes are $1200, and planned investment is $1400. Consumers spend according to the equation C = 100 + 0.8Yd, where Yd represents disposable income. Given this information, fill out the table below to determine which of the output levels represents a macroeconomic equilibrium, then answer the questions that follow. Output (Income) Y Net Taxes T Disposable Income Yd Consumption C Planned Investment I Government Purchases G Planned Aggregate Expenditure AE Unplanned Inventory Change 6200 1200 5000 3850 1400 1000 6250 -50 6700 1200 5500 4225 1400 1000 6625 75 7200 1200 6000 4600 1400 1000 7000 200 7700 1200 6500 4975 1400 1000 7375 325 8200 1200 7000 5350 1400 1000 7750 450

An a. Which level of output is a macroeconomic equilibrium? There is no level of equilibrium based on inventory levels.

b. Is the government budget balanced, in deficit, or surplus, and by how much? Since the government is spending less than it is collecting in taxes, we are showing a surplus.

c. Find the marginal propensity to consume, and the marginal propensity to save. d. Find the government spending multiplier. If the government wanted to increase the equilibrium level of income by $1,000, how much would it have to increase government purchases? e. Find the tax multiplier. If net taxes were lowered by $100, what effect would it have on the equilibrium level of income? Give a specific numerical answer.

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Income (Y)	Net Tax (T)	Disposable Income (Y_D)	Consumption (C)	Saving (S)	Investment (I)	Gov. Spending (G)	Total Expenditure (TE)
10,000	1,000			1,300	2,000	1,500
12,000	1,000			1,700	2,000	1,500
13,000	1,000				2,000	1,500
15,000	1,000				2,000	1,500
16,000	1,000				2,000	1,500
18,000	1,000				2,000	1,500
20,000	1,000				2,000	1,500

a) Fill in the missing values.

b) What is the equilibrium output level?

c) If the current output level is 15,000, what would likely happen to the output level next year? Why?

d) By how much will the equilibrium output level increase (decrease) if the planned investment falls by 500?

e) By how much will the equilibrium output level increase (decrease)if the tax (T) decreases by 400?

f) By how much will the equilibrium output level increase (decrease) if the government spending (G) decreases by 800?

g) By how much will the equilibrium output level increase (decrease) if the government spending (G) decreases by 300 and at the same time, the government cuts taxes by the same amount of 300?

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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?

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ECN 101 Lecture Notes - Lecture 2: Demand Curve, Aggregate Supply, Government Spending

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