Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 34, Problem 2.2P
Subpart (a):
To determine
To determine the equilibrium income in Country H, the government deficit and the current account balance.
Subpart (b):
To determine
To determine the equilibrium income when the government spending increases and the impact on imports based on the multiplier.
Subpart (c):
To determine
To determine the impact of an import quota on multiplier.
Subpart (d):
To determine
To determine how to attain the current account balance.
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A 3-sector economic model was constructed and solved, and assuming the parameters
take on certain values, the multiplier matrix that is obtained is displayed in Table 1.
You are required to answer the following questions by showing your calculation in
the space provided.
Table 1: Multiplier Matrix
Exogenous Variables
Endogenous Variables
I*
G*
T*
: Output
: Consumption Expenditure 1.895
: Tax Revenue
Y
2.631
2.631
- 2.105
C
1.895
- 2.316
T
0.263
0.263
0.789
YD : Disposable Income
: Government Budget
2.368
2.368
- 2.895
0.263
- 0.737
0.789
Balance
: Saving
0.474
0.474
- 0.579
(a) If autonomous investment is reduced by
100, justify its precise impact on
disposable income and tax.
Answer : AYD =
AT =
80, what is the amount of
(b) If the govemment has increased its spending by
autonomous tax that is required so that the govemment's action in increasing its
spending does NOT have an impact on the government's budget balance?
Answer : AT* =
Calculate the missing values in the table below given that the Aggregate Consumption Function for a
country is equal toC= 150 + 0.75Y and planned investment is fixed at 300.
Aggregate
Output
(Income) (Y)
Aggregate
Consumption Investment
(C)
Unplanned
Inventory
Change (Y-AE)
Planned
Planned Aggregate
Expenditure (AE)
Equilibrium?
(1)
1,500
300
1,800
300
2,100
300
2,400
300
2,700
300
What is likely to happen to aggregate output if the economy produces above the equilibrium
level? How much is aggregate saving at the equilibrium level?
Calculate the multiplier.
Calculate the new equilibrium if Planned Investment increased by $50M.
Problem 1:
You are given the following model for the economy of a country:
Consumption function: C=2000+0,75-YDI
Investment function: I=10500
Government spending: G = 12000
Tax function: T=200+0,4·Y
- Disposable income: YD = Y -T+TR
Transfer: 1000
a) What is the level of equilibrium output?
b) What is the new equilibrium output if investment decreases by 2 000 units?
c) How much does the government collect in taxes when the economy is in equilibrium?
d) What is level of the government’s budget?
e) Calculate the tax multiplier?
f) Calculate consumption at the equilibrium output.
Chapter 34 Solutions
Principles of Economics (12th Edition)
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