Consider a hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35. The marginal propensity to consume (MPC) for this economy is 0.65 ▼, and the spending multiplier for this economy is 2.8571 ▼ Suppose the government in this economy decides to increase government purchases by $350 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to $500 billion. This increases income yet again, causing a second change in consumption equal to ▼. The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate-demand curve (AD₁) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate-demand curve (AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate-demand curve (AD2) is parallel to the initial aggregate-demand curve (AD1). You can see the slope of AD₁ by selecting it on the graph. 140 135 130 125 AD₁ AD₂ ?

Consider a hypothetical closed economy in which households spend $0.65 of each additional dollar they earn and save the remaining $0.35. The marginal propensity to consume (MPC) for this economy is 0.65 ▼, and the spending multiplier for this economy is 2.8571 ▼ Suppose the government in this economy decides to increase government purchases by $350 billion. The increase in government purchases will lead to an increase in income, generating an initial change in consumption equal to $500 billion. This increases income yet again, causing a second change in consumption equal to ▼. The total change in demand resulting from the initial change in government spending is The following graph shows the aggregate-demand curve (AD₁) for this economy before the change in government spending. Use the green line (triangle symbol) to plot the new aggregate-demand curve (AD2) after the multiplier effect takes place. For simplicity, assume that there is no "crowding out." Hint: Be sure that the new aggregate-demand curve (AD2) is parallel to the initial aggregate-demand curve (AD1). You can see the slope of AD₁ by selecting it on the graph. 140 135 130 125 AD₁ AD₂ ?

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.4P

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7) Define the tax multiplier and give the algebraic expression.8) Assume that the government spending multiplier is equal to 4. Calculate the tax multiplier from thisinformation.9) Calculate how much output would expand by if the government increased spending by $500 billion and financedthis spending by increasing lump-sum taxes by the same amount.
1. Suppose that the economy can be described by the following equations: C = 400 + (8/9)*DI I = 300G = 800T = (1/2)*Y (X – M) = 0. a. If national income (Y) increased by $1, by how much would consumption increase? What is the name of this concept?b. Find the equilibrium level of output.c. The budget for this fiscal year increases government spending by $50. i) Sketch the effect of the increase in government spending.ii) Calculate the new equilibrium level of income.iii) Calculate the change in income and compare to the increase in government spending. Comment.iv) Given your numerical answer in part (iii), calculate the change in national income when government spending increases by one dollar.v) Derive the actual value of the fiscal multiplier using an algebraic equation. Compare to part (iv).Now G assumes its original value of G = 800.d. Congress decreases the tax rate from (1/2) to (1/4) i) Sketch the effect of the decrease in the tax rate. ii) Calculate the new equilibrium level of…
Assume that the economy is now governed by a government and begins trading with other economies. The economy is described by the following set of equations. ?=1000+0.5⋅?d ID = 600 G=700 T=400 EX=0.1⋅Y IM=100+0.1⋅Y YD = Y - T Calculate the equilibrium level of output Y* a) 2857 b) 4000 c) 6274 d) 4400 Whats the government expenditure multiplier? Whats the tax multiplier? Whats the ba;anced budget multiplier?
7 Derive multiplier for a change in the government purchase and the taxes. Why is the tax multiplier smaller than the government purchase multiplier?
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4. Why does a reduction in taxes have a smaller multiplier effect than an increase in government spending of an equal amount?