Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
expand_more
expand_more
format_list_bulleted
Question
Chapter 11, Problem 4E
To determine
The effect of an increase in government purchases on the IS curve.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Suppose we have the following information for the simple (fixed r, fixed P, fixed W) Keynesian model.
C = 400 + 0.8 I = 310
G = 140
= 400 + 0.8 (Y - T) T = 200,
where C is the consumption function, (Y - T) is disposable income, I is investment, G is government spending, and T is taxes.
What can you say about the government's budget situation? (Hint: Think about what “G” and “T” stand for.)
Group of answer choices
A) There is a budget surplus.
B) There is a budget deficit.
C) None of the other options.
D) We cannot say anything about the government budget.
E) The budget is balanced.
Suppose that the federal government decides to reduce the budget deficit and cuts government purchases by $200 billion and raise personal income taxes by $200 billion. Suppose the MPC = .5.
a. How much and in which direction would the AD curve shift because of the government spending cut?
b. How much and in which direction would the AD curve shift because of the tax increase? Show your work.
c. Using the above numbers, draw the AS-AD diagram and illustrate the short-run impact of the combined policy action assuming the economy begins at potential output. Label the original equilibrium with point "A" and the new short-run equilibrium with point "B".
d. Describe the impact of the policy action on employment/unemployment, spending, and prices/inflation. Be sure to include the impact of the spending multiplier.
e. In moving from points "A" to point "B" on the AS-AD diagram, why do firms change their production?
f. Characterize the labor market at point "B".
g. Describe the process of…
Suppose there is some hypothetical closed economy in which households spend $0.80 of each additional doilar they earn and save the remaining
$0.20.
The marginal propensity to consume (MPC) for this economy is
, and the spending multiplier for this economy is
Suppose the government in this economy decides to decrease government purchases by $400 billion. The decrease in government spending will lead
to a decrease in income, creating an initial change in consumption equal to
This decreases income yet again, leading to a
second change in consumption equal to
The total change in demand resulting from the initial change in government spending is
Chapter 11 Solutions
Macroeconomics (Fourth Edition)
Knowledge Booster
Similar questions
- 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…arrow_forwardSuppose we have the following information for the simple (fixed r, fixed P, fixed W) Keynesian model. C = 400 + 0.8 I = 310 G = 140 = 400 + 0.8 (Y - T) T = 200, where C is the consumption function, (Y - T) is disposable income, I is investment, G is government spending, and T is taxes If government spending increased by $80, equilibrium Y would Group of answer choices A) increase by $400. B) decrease by $160. C) increase by $80. D) increase by $320. E) increase by approximately $106.67.arrow_forwardAlthough our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, most countries levy some taxes that rise automatically with national income. (Examples in the United States include the income tax and the payroll tax.) Let’s represent the tax system by writing tax revenue as T = T− + tY, where T− and t are parameters of the tax code. The parameter t is the marginal tax rate: if income rises by $1, taxes rise by t × $1. 1.How does this tax system change the way consumption responds to changes in GDP? 2. Im the Keynesian cross, how does this tax system alter the government purchases multiplier? 3. In the IS–LM model, how does this tax system alter the slope of the IS curve? (solve all three tasks)arrow_forward
- 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 of the following statements is correct? choose 5 Select one or more: a. In a demand-driven economy demand is equal to supply in equilibrium b. In a demand-driven economy, supply creates its own demand c. The aggregate demand equation is given by AD = c0 + c1Y + I d. If the economy above is a demand-driven economy, then the equilibrium solution for Y is given by Y = (c0 + I)/(1-c1 ) e. In a demand-driven economy the AD curve is a vertical line f. In a supply-driven economy demand is equal to supply in equilibrium g. if c1 is a number between 0 and 1, and I+c0 >0 then the aggregate demand equation is a straight line that must intersect the…arrow_forwardAn economy's IS curve represents the following markets. Goods: slc = 4 MPC = 0.7 G = 10 T = 9 Finance: I = 10 - 90r and r = 0.047 Currently, expenditure Y0 = 44.9. However the government decides to embark on a fiscal expansion, setting G to G1=12. The expenditure reacts to the new government spending G. Before the interest rate or anything else has time to react, the new expenditure is 51.567 Now we're adding an LM curve to the economy from above. The money market is given by M/P = 0.02 / (r - Y/10,300)^2 M = 22 P = 2 1. We continue with the fiscal expansion scenario, with G0=10 and G1=12. Draw a new graph that includes the LM curve and both the IS curves. Show how at the same old unchanged r = 0.047 the volume of transactions supported by the money market is lower than the expenditure afforded by the goods and financial markets. That is, map r=0.047 into the expenditure, Y1, and into the original volume of transactions, Y0. 2. Now let's let the three markets interact and choose the…arrow_forwardTwo identical countries, Country A and Country B, can each be described by a Keynesian-cross model. The MPC is 0.6 in each country. Country A decides to increase government spending by $2 billion, while Country B decides to cut taxes by $2 billion. In which country will the new equilibrium level of income be greater? Show all computations.arrow_forward
- According to computer estimates using a traditional macroeconomic model, the Obama administration found that the multiplier for tax cuts and government expenditures were respectively a. 0.99 and 1.59 b. 1.59 and 0.99 c. 1.3 and 1.7 d. 1.7 and 1.3arrow_forwardFiscal policy consists of intentional changes in the government's spending levels or tax policies designed to achieve specific macroeconomic goals such as full employment, price stability, or economic growth. By influencing the amount of total spending in the economy, the government can influence the position of the aggregate demand curve. Our theory tells us that aggregate demand will shift by a multiple of the change in spending or taxes. However, spending and tax changes have slightly different effects, as changes in taxes affect spending only indirectly by changing the amount of disposable income. An expansionary fiscal policy may be implemented to fight a recession, while a contractionary policy may be appropriate to control demand-pull inflation. Exploration: How do changes in government spending and taxes affect the equilibrium price level and real GDP? Discuss in detail use your economics textbook.arrow_forwardIn a simple model without government spending or taxation, if C = a +bY where C is consumer spending and Y is GDP which of the following statements are correct? (Note that the algebra is deliberately written differently from the lecture notes to test your understanding!) Note that some of these questions require you to have read relevant sections of Core Unit 13. Select one or more: O a. a is known as the marginal propensity to consume Ob.a is the level of consumption when Y is zero c. b is known as the marginal propensity to consume O d. b is known as the average propensity to consume Oe. The consumption function implies that if GDP is zero, consumption is zero O f. If there is an increase in consumers who engage in "consumption smoothing", this will cause an increase in a and a decrease in b g. If there are more credit-constrained consumers in the economy, this will cause the marginal propensity to consume, to fall O h. If consumption-smoothing consumers become more optimistic about…arrow_forward
- Which do you believe is the better macroeconomic policy to use for stabilizing (achieving potential GDP and controlling inflation) the economy - Monetary or Fiscal? SUPPORT your stance (for example, if you believe fiscal policy is better than monetary policy, explain how fiscal policy (pros) achieves these objectives better than monetary policy (cons)).arrow_forwardAn economy's IS curve represents the following markets. Goods: slc = 4 MPC = 0.7 G = 10 T = 9 Finance: I = 10 - 90r and r = 0.047 Currently, expenditure Y0 = 44.9. However the government decides to embark on a fiscal expansion, setting G to G1=12. 1. The expenditure reacts to the new government spending G. Before the interest rate or anything else has time to react, find the new expenditure. 2. graph the change in the IS curve. Label axes and curves, project the new and the old values on respective axes. 3. How will the IS curve be affected? a. slide down along the IS curve b. slide up along the IS curve c. shift of the IS curve right d. shift of the IS curve leftarrow_forwardConsider a simple Keynesian income-spending model of an economy described by the following equations 1. C= 250 + 0.75Yd TR = 200 T = 0.1Y 1=250 %3D G= 600 X = 350 %3D M=0.15Y (a) Calculate the equilibrium income level. (b) Sketch this equilibrium position using a two-dimensional graph. If potential GDP is 3,570 what is the size of the output gap? If public sector spending on goods and services is increased by 50, what is the new equilibrium level of income? How much should public spending have been increased by in order to have closed the output gap? (c) [All calculations to one decimal point. You must report your calculations.] MacBook Air 888 000 F1 F2 F3 F4 FS F7 F10 £ # @ € 2 $ % & 3 4 5 6 7 8 %3D Q E R Y A S F V alt cmd cmd Varrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSON
Engineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education