Ouestion I

Supposons que la fonction de consommation est de C = 100 + — T) , que les investissements sont de 60. que les dépenses gouvemementales sont de 200 et que les impöts sont proportionnels au revenu T=rY

a) Quel est le PIB d'équilibre en fonction de t?

b)Quel est le multiplicateur des dépenses gouvemementales? Est-ce qu'il augmente avec une hausse  des impöts (augmentation de r)

c)Si r=0.25 , quel est le PIB d'équilibre? Quel est le surplus/déficit budgétaire du gouvemement?

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

The market demand for good Y is described by the function Y_D = 310 - 6P_D, and the market supply of good Y is given by function Y_S = 4P_S. (Y_D is the quantity of good Y demanded, P_D is the demander price (in $) per unit of good Y, and P_S is the supplier price (in $) per unit of good Y).

a) Find the market equilibrium quantity and equilibrium price.

b) Suppose that Government plans to apply a tax of 10$ per unit of good Y. Find the impact of this tax on market equilibrium. What are the new equilibrium quantity, the demander price, and the supplier price in case of implementation of this policy?

c) Suppose that Government plans to apply a subsidy of 20$ per unit of good Y. Find the impact of this subsidy on market equilibrium. What are the new equilibrium quantity, the demander price, and the supplier price in case of implementation of this policy?

The Modified Keynesian Model

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

C = 150 + 0.9DI … consumption function

I = 50 … autonomous investment

G = 100 … autonomous government spending

X = 200 … autonomous exports

IM = 100 … autonomous imports

And also:

DI = Y – T + Tr T = 0 … autonomous taxes

Tr = 0 … autonomous transfer payments

YF = 5000 … 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? … the value of the MPS?

5. Calculate the “oversimplified” expenditure multiplier.

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

7. (Refer to question “6”.) 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 “6”. 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 “9”). What would be the value of the national debt after this policy action?