An economy is initially described by the following equations: C = 60 + 0.8(Y–T) I = 120–5r MIP = Y-25r G = 200 T= 200 M = 3000 P= 3 b. Suppose that a newly elected president cuts taxes by 25 percent. Assuming the money supply is held constant, what are the new equilibrium interest rate and level of income? What is the tax multiplier? new equilibrium r. new equilibrium Y: tax multiplier:

On the following graph, AD1 represents the initial aggregate demand curve in a hypothetical economy, and AS represents the initial aggregate supply curve. The economy's full-employment output is $12 trillion. On the following graph, use the grey point (star symbol) to mark the equilibrium. (Note: You will not be graded on any adjustments made to the graph.) PRICE LEVEL (CPI) AS 106 105 104 103 63 102 101 100 99 98 AD AD 吕 1 97 96 Full Employment 96 6 7 8 9 10 11 12 13 14 15 16 REAL GDP (Trillions of dollars) AD 2 Equilibrium The initial short-run equilibrium level of real GDP is $ trillion, and the initial short-run equilibrium price level is Suppose the government, seeking full employment, borrows money and increases its expenditures by the amount it believes necessary to close the

Consider the following economy:   C = 300 + 0.8 (Y – T) I = $300                                               G = $200 and T = $250   What is the equilibrium level of national income? What is the change in national income, if only government spending increases by $10?  What is the government spending multiplier? What is the change in national income, if only taxes increase by $10? What is the tax       multiplier? Based on (b) and (c), does the balanced budget multiplier theorem hold? What is the change in national income, if both government spending and taxes increase by $10 each?

How can a reduction in Corporation Tax lead to supply side improvements in an economy?

3.5

On the following graph, AD1 represents the initial aggregate demand curve in a hypothetical economy, and AS represents the initial aggregate supply curve. The economy's full-employment output is $12 billion. On the following graph, use the grey point (star symbol) to mark the equilibrium. (Note: You will not be graded on any adjustments made to the graph.) PRICE LEVEL (CPI) 106 105 104 103 102 H AS 1ŏ1 101 ADA 100 AD 3 99 AD 2 98 AD1 97 Full Employment 96 6 7 8 9 10 11 12 13 14 15 16 REAL GDP (Billions of dollars) Equilibrium (?)

The government lowers $0.9 trillion in taxes, restoring GDP from $10 trillion to its potential level of $11.2 trillion. What is the value of the tax multiplier?   A -1.33   B -0.9   C -0.75   D -1   E -1.2

3.6

Given that the maginal propensity to consume (MPC) is 0.50, what is the change in equilibrium output (or aggregate demand), if there is a tax is reduced by 50? Hint: Use the tax multiplier formula. -50 -25 50 25

Assume the tax multiplier is estimated to be 1.3 and the aggregate supply curve has its usual upward slope. Suppose the government lowers taxes by $75 million. Aggregate demand will by $ million. (Enter your response rounded to one decimal place.)