Assume a closed economy (no import or export) characterised by the following equations describing the behaviour of aggregate demand: Consumption function: C = Co + C₁(YT) T = to +t₁Y [Taxation rule] Investment and government spending are assumed to be constant: I = I and G = G Where co is autonomous consumption, to is autonomous taxation, C₁ = 0.6 is the marginal propensity to consume, t₁ = 0.2 is the sensitivity of tax revenues to income. a) Explain why it is reasonable to assume that government tax revenues would respond to changes in income. b) Solve for the equilibrium output in the goods market. c) What is the Keynesian multiplier in this economy? How is it related to the parameters of the model. d) Assume autonomous consumption co falls by £1 Billion. Calculate the change in equilibrium output. Represent the effect of the shock on a Keynesian cross diagram. Complete the table below and explain in words how the taxation rule affects the Keynesian multiplier. e) f)

Assume a closed economy (no import or export) characterised by the following equations describing the behaviour of aggregate demand: Consumption function: C = Co + C₁(YT) T = to +t₁Y [Taxation rule] Investment and government spending are assumed to be constant: I = I and G = G Where co is autonomous consumption, to is autonomous taxation, C₁ = 0.6 is the marginal propensity to consume, t₁ = 0.2 is the sensitivity of tax revenues to income. a) Explain why it is reasonable to assume that government tax revenues would respond to changes in income. b) Solve for the equilibrium output in the goods market. c) What is the Keynesian multiplier in this economy? How is it related to the parameters of the model. d) Assume autonomous consumption co falls by £1 Billion. Calculate the change in equilibrium output. Represent the effect of the shock on a Keynesian cross diagram. Complete the table below and explain in words how the taxation rule affects the Keynesian multiplier. e) f)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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• Assuming that there is no government spending or trade, an economy's GDP is the sum of domestic consumption C and investment I, ie. Y = C+ I • Assume that I is unaffected by GDP • Assume the consumption function is C = co + cY • In any equilibrium aggregate demand, AD must be equal to Y, GDP. Given this model, which of the following statements is correct? This question is worth 2 marks! Select one or more: a. The aggregate demand equation is given by AD = co + CY + I b. c, is equal to autonomous consumption c. if c, is a number between 0 and 1, and I+co >0 then the aggregate demand equation is a straight line that must intersect the 45 degree line at some point. d. In a demand-driven economy the AD curve is a vertical line e. In a demand-driven economy demand is equal to supply in equilibrium f. In a supply-driven economy demand is equal to supply in equilibrium g. In a demand-driven economy, supply creates its own demand h. If the economy above is a demand-driven economy, then the…
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in the aggregate expenditure model for a closed economy assuming investment, government spending and taxes are exogenous, if the marginal prosperity to consume is 0.8, a simultaneous 50 unit increase in government spending and a 20 unit decrease in investment will change equilibrium income by?
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Assuming that there is no government spending or trade, an economy’s GDP is the sum of domestic consumption C and investment I, i.e. Y = C+ I Assume that I is unaffected by GDP Assume the consumption function is C = c0 + c1Y In any equilibrium aggregate demand, AD must be equal to Y, GDP. Given this model, which FIVE of the following statements are correct? Select one or more: A. If the economy above is a demand-driven economy, then the equilibrium solution for Y is given by Y = m(c0 + I), where m = 1/(1 - c1) is the multiplier. B. if c1 = 0.8 the multiplier is equal to 1/0.8= 1.25 C. if c1 = 0.75 the multiplier is equal to 4 D. assume c0 =100, I=50, c1=0.6. The equilibrium value of Y in a demand-driven economy is 300. E. Assume that Y is initially 400, I is initially 100, and the multiplier is 2.5. I increases by 10%. The multiplier implies that in equilibrium Y will increase by 25%. F. The higher is c1 the larger is the multiplier G. If consumers…
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Given the above model for an economy C = 100 + 0.8Yd G = 800 T = 500 I = 200 c)Find Tax multiplier. d)Find the new level of output if the lump-sum tax is increased by 100 (ΔT = 100). f)Find the new level of output if the government spending is increased by 100 and this government expenditure increase is financed by the same amount of increase in lump-sum taxes (ΔG = ΔT = 100).
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Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Economy B has a marginal propensity to consume of 0.7, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Suppose there is an increase in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? Select one: O A. The AD curve shifts farther to the right in Economy A than Economy B. O B. The AD curve shifts to the left the same amount in both economies. O C. The simple multiplier is larger in Economy A. O D. The AD curve shifts to the right the same amount in both economies. O E. The AD curve shifts farther to the left in Economy B than Economy A.
The marginal propensity to consume is defined as: Question 64 options: the ratio of change in consumption on both domestic and foreign items to the change in income average consumption as a proportion of income the ratio of the change in consumption on domestic items to the change in income the change in consumption on domestic items multiplied by the change in income the change in consumption on domestic and foreign items multiplied by the change in income
Consider a simple Keynesian model with taxation. Suppose the marginal rate of tax is 0.2 and the marginal propensity to consume is 0.5. Then a decrease in investment expenditure of 100 units will: Group of answer choices None of the other options Increase equilibrium output by approximately 150 units Increase equilibrium output by approximately 167 units Decrease equilibrium output by approximately 150 units