6 Consider a ypothetical closed economy in which the marginal propensity to consume (MPC) is 0.8 and taxes do not vary with income (that is,taxes are fixed rather than variable and the income tax ratet=0). The following graph shows the aggregate demand curves (ADI and AD2), theshort-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A.140Potential GDP136AS124132128124P 120116AD1112AD,100400500600700s00900100011001200REAL GDP (B4lions of dollars)The economy is currently experiericinggap of Sbillion.To cdose this gap, one option would be for the government togovernment purchases by Sbillion (assuming net taxes donot change).If the government kept its purchases constant, it could also close the gap bynet taxes (taxes minus transfers) by 5billion(Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes isMIC1- MICGrade It NowSave & ContinueContinue without savingPRICE LEVEL

Here, the marginal propensity to consume of the people of a closed economy is given as 0.8, and the…

Consider a ypothetical closed economy in which the marginal propensity to consume (MPC) is 0.8 and taxes do not vary with income (that is taxes are fixed rather than variable and the income tax rate t= 0). The following graph shows the aggregate demand curves (ADI and AD2), the short-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A. 140 Potential GDP 136 AS 132 128 124 P 120 116 AD2 112 AD, 108 400 500 600 700 s00 900 1000 1100 1200 REAL GOP (Blions of dollars) The economy is currently experiericing gap of S billion. To cose this gap, one option would be for the government to government purchases by S billion (assuming net taxes do not change). billion net taxes (taxes minus transfers) by S MIC 1- MIC If the government kept its purchases constant, it could also close the gap by (Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is Grade It Now Save & Continue PRICE LEVEL

Consider a ypothetical closed economy in which the marginal propensity to consume (MPC) is 0.8 and taxes do not vary with income (that is taxes are fixed rather than variable and the income tax rate t= 0). The following graph shows the aggregate demand curves (ADI and AD2), the short-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A. 140 Potential GDP 136 AS 132 128 124 P 120 116 AD2 112 AD, 108 400 500 600 700 s00 900 1000 1100 1200 REAL GOP (Blions of dollars) The economy is currently experiericing gap of S billion. To cose this gap, one option would be for the government to government purchases by S billion (assuming net taxes do not change). billion net taxes (taxes minus transfers) by S MIC 1- MIC If the government kept its purchases constant, it could also close the gap by (Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is Grade It Now Save & Continue PRICE LEVEL

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter15: Fiscal Policy

Section: Chapter Questions

Problem 6SQ

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Due to an increase in consumer wealth, there is a $40 billion autonomous increase in consumer spending in the economies of Westlandia and Eastlandia. Assuming that the aggregate price level is constant, the interest rate is fixed in both countries, and there are no taxes and no foreign trade, complete the accompanying tables to show the various rounds of increased spending that will occur in both economies if the marginal propensity to consume is 0.5 in Westlandia and 0.75 in Eastlandia. What do your results indicate about the relationship between the size of the marginal propensity to consume and the multiplier?
Consider two hypothetical economies that are perfectly similar except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real income and planned expenditure equal to $100 billion, as given by the black points (plus signs) on the following two graphs. Assume that both economies are closed to trade, and that neither economy has taxes that change with income. The graphs also plot the 45-degree line. The first economy has an MPC equal to 0.5. Therefore, its initial planned expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy has an MPC equal to 0.75. Therefore, its initial planned expenditure line has a slope of 0.75 and passes through the point (100, 100). Now, suppose there is an increase of $20 billion in planned investment in each economy. In the first economy (with MPC = 0.5), the $20 billion increase in planned investment causes equilibrium income to increase by billion. In the second…
Consider a hypothetical closed economy in which the marginal propensity to consume (MPC) is 0.5 and taxes do not vary with income (that is, taxes are fixed rather than variable and the income tax rate t = 0). The following graph shows the aggregate demand curves (AD₁ and AD2), the short-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A. PRICE LEVEL 140 Potential GDP 136 132 128 124 A 120 116 112 108 400 500 600 AD 1 AD2 AS 124 700 800 900 1000 1100 1200 REAL GDP (Billions of dollars) ? The economy is currently experiencing a recessionary gap of $ billion. To close this gap, one option would be for the government to decrease not change). government purchases by $ billion (assuming net taxes do If the government kept its purchases constant, it could also close the gap by cutting ▼ net taxes (taxes minus transfers) by $ - MPC (Hint: In this case, since taxes do not vary with income, the formula for the…
Consider a hypothetical closed economy in which the marginal propensity to consume (MPC) is 0.5 and taxes do not vary with income (that is, taxes are fixed rather than variable and the income tax rate t = 0). The following graph shows the aggregate demand curves (AD₁ and AD₂), the short-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A. PRICE LEVEL 140 136 132 128 124 120 116 112 108 100 200 Potential GDP The economy is currently experiencing AD 1 AD2 AS 124 300 400 500 600 REAL GDP (Billions of dollars) 700 800 To close this gap, one option would be for the government to not change). 900 gap of $ billion. government purchases by $ billion (assuming net taxes do If the government kept its purchases constant, it could also close the gap by net taxes (taxes minus transfers) by $ MPC (Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is…
Consider a hypothetical closed economy in which the marginal propensity to consume (MPC) is 0.5 and taxes do not vary with income (that is, taxes are fixed rather than variable and the income tax rate t = 0). The following graph shows the aggregate demand curves (AD1 and AD2), the short-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A. PRICE LEVEL 140 Potential GDP 136 132 128 124 A 120 116 112 108 400 500 600 AD 2 AD₁ 700 800 900 AS 124 1000 1100 1200 REAL GDP (Billions of dollars) The economy is currently experiencing a recessionary gap of $ billion. To close this gap, one option would be for the government to decrease not change). government purchases by $ billion (assuming net taxes do If the government kept its purchases constant, it could also close the gap by cutting (Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is net…
Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy.
Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output. (Hint: You can see the slope and vertical…
Consider two closed economies that are identical except for their marginal propensity to consume (MPC). Each economy is currently in equilibrium with real GDP and total expenditure equal to $100 billion, as shown by the black points on the following two graphs. Neither economy has taxes that change with income. The grey lines show the 45-degree line on each graph. The first economy's MPC is 0.5. Therefore, its initial total expenditure line has a slope of 0.5 and passes through the point (100, 100). The second economy's MPC is 0.70. Therefore, its initial total expenditure line has a slope of 0.70 and passes through the point (100, 100). Now, suppose there is an increase of $30 billion in investment in each economy. Place a green line (triangle symbol) on each of the previous graphs to indicate the new total expenditure line for each economy. Then place a black point (plus symbol) on each graph showing the new level of equilibrium output.
Assume that a hypothetical economy with an MPC of .8 is experiencing severe recession. By how much would government spending have to increase to shift the aggregate demand curve rightward by $25 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? Why the difference? Determine one possible combination of government spending increases and tax decreases that would accomplish the same goal.
Consider a hypothetical closed economy in which there are no income taxes. If households spend $0.75 of each additional dollar they earn and save the remainder, the expenditure multiplier for this economy is The following graph shows the initial aggregate demand (AD) and short-run aggregate supply (SRAS) curves of this economy. Suppose that the economy is currently in a recession. Business firms are pessimistic about the future and do not respond to a fall in interest rates. In addition, all households are pessimistic about job prospects and desire to consume less and save more at all levels of income. As a result, personal consumption in this economy decreases by $1 billion. The reduction in personal consumption will lead to a decrease in aggregate demand by S Shift either the AD curve or the SRAS curve, or both, to show the new aggregate demand curve after the full impact of the multiplier process of the reduction in personal consumption has taken place. PRICE LEVEL (Billions of…
The following are exogenous (not directly affected by income): G = 9 I = 14 X = M = 0 The consumption function is: C = k + cY, where k = 8, c = 0.6 What is the equilibrium level of GDP? State to ONE decimal place What is the multiplier for this economy? The following are exogenous (not directly affected by income): G = 11 I = 4 X = M = 0 The consumption function is: C = k + cY, where k = 3, c = 0.8 What is the equilibrium level of GDP? What is the multiplier? Same information as in the previous question: The following are exogenous (not directly affected by income): G = 11 I = 4 X = M = 0 The consumption function is: C = k + cY, where k = 3, c = 0.8 Imagine the maximum potential output or real GDP of this economy is 100. Assume that is the same as saying we reach the edge of the PPF at 100. Now assume we want to get that economy from the current level of GDP to its maximum potential of 100. We can do this in two ways - either increase government spending (G) or reduce taxes, (we…
Assume the Potential GDP is $15 trillion dollars. Use the table below to answer the following questions. Assume all values represent trillions of dollars. Use the table to create two graphs: 1. aggregate expenditure model and 2. an aggregate supply aggregate demand model. Note that the equilibrium in the table above will determine your real GDP and your potential GDP should be plotted in both graphs. What type of macroeconomic equilibrium does this economy reflect? Note that the multiplier is 2 because this economy has imports. If Investment expenditures increase by $2.5, how much does GDP increase? Does the increase in investment expenditures from part C result in a full employment equilibrium? Why? Graphically show the effects from part C in our Aggregate Expenditure Model and Aggregate Supply-Aggregate Demand Model.