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 18, Problem 6E
(a)
To determine
The possible ways to change the spending and taxes to assure the budget constraint.
(b)
To determine
Impact of obeying the permanent income hypothesis on consumption.
(c)
To determine
The impact on private saving, total saving, and the investment in different scenarios.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Use the following information to answer questions 1, 2, and 3. Suppose that the government of Uplandia is experiencing a large budget deficit with fixed government expenditures of G=375 and fixed taxes of T= 225. Assume that consumers of Uplandia behave as described in the following consumption function:
C = 450 + 0.96 (Y - T)
Suppose further that investment spending is fixed at 300.
1. Calculate the equilibrium level of GDP in Uplandia. Solve for equilibrium levels of Y, C, and S.
2. Next, assume that the National Congress in Uplandia succeeds in reducing taxes by 89 to a new fixed level of 136. Recalculate the equilibrium level of GDP using the tax multiplier.
3. Solve for equilibrium levels of Y, C, and S after the tax cut and check to ensure that the multiplier worked.
Suppose that planned investment and planned government purchases do not depend on income:
| = 15 and G = 17. Consumption, as you would expect, does depend on income via the
consumption function C = 2 + 0.75Y – 0.75T. Net taxes are T = 12.
Your friend thinks that the equilibrium will be where Y = 150 but he is wrong. What is the best
description of this situation?
the (Y, AE) point is above the 45 degree line, Y will adjust down
the (Y, AE) point is above the 45 degree line, Y will adjust up
the (Y, AE) point is below the 45 degree line, Y will adjust down
the (Y, AE) point is below the 45 degree line, Y will adjust up
Assuming you are the Minister of Finance and Economic Planning for Nigeria, in charge of Fiscal Policy. The Research Director of the Ministry brought you the following data on Nigeria’s for the previous fiscal year, 2021.
An examination of the data reveals that, during the fiscal year 2021, households in Nigeria saved 20% of their disposable income (Yd) and spent the rest on consumption. In addition, ₦5,000.00 was spent on Consumption expenditure (C), which is independent of income and Gross Private Investment (I) was ₦ 7,000.00. Total Government expenditure (G) which stood at ₦8,000.00 was supposed to be financed by a lump sum tax of ₦2,000.00 (independent of income) and a proportional tax rate of 25% of national income. Exports (X) stood at ₦2,500.00. In addition, the country’s import (M) during the previous fiscal year comprises of ₦1,000.00 which was independent of the country’s national income and 10% which was dependent of the country’s national income. Given these data on…
Knowledge Booster
Similar questions
- Please check the solution to (a) and (b) of the following problem for accuracy and elaborate: Given MPC (marginal propensity to consume) = 0.75, if the government implements an expansionary fiscal policy as (a) cutting taxes by $10 billion, then by how much would total spending increase over an infinite period? (b) spending $10 billion, then by how much would total spending increase over an infinite period? MPC = 0.75 Tax multiplier = (-MPC / 1) = (-0.75 / 1 – 0.75) = (-0.75 / 0.25) = -3. (a) Cutting taxes by $10 billion. The total spending increase by (-3) (-$10 billion) = $30 billion. Spending multiplier = (1/1 – MPC) = (1 / 1 – 0.75) = 1 / 0.25 = 4 (b) Spending 1ncrease by 10 billion. The total spending increase by (4) ($10 billion) = $40 billion.arrow_forwardSuppose that autonomous consumption (a) is 300, private investment spending (I) is 420,government spending (G) is 400 , Net taxes (T) are 400 and marginal propensity to consume(b) is 80 %, and marginal tax rate (t) is 25 % . By using the above information: b) Suppose that the potential income level is 2500 in the economy. In this case, what kind offiscal policy you can use to reach the full employment level. (show this numerically andexplain it on your graph)arrow_forwardAssume that the economy is in a severe recession with a high level of under-utilized capacity. The estimated overall consumption function is: C = $150 million + 0.9 Y The government estimates that a $180 B increase in Aggregate Demand is necessary to restore the economy to a full-employment level of output. It determines that the best way to do achieve this is through fiscal stimulus. How much of a tax cut (in $) would be necessary? If the government wanted to maintain a balanced budget, would it be able to stimulate the economy through fiscal policy actions? How could it do this?arrow_forward
- Assume that the economy is in a severe recession with a high level of under-utilized capacity. The estimated overall consumption function is: C = $150 million + 0.9 Y The government estimates that a $180 B increase in Aggregate Demand is necessary to restore the economy to a full-employment level of output. It determines that the best way to do achieve this is through fiscal stimulus. How much of an increase in direct government spending would be necessary to achieve this desired AD increase? How much of a tax cut (in $) would be necessary? If the government wanted to maintain a balanced budget, would it be able to stimulate the economy through fiscal policy actions? How could it do this?arrow_forwardIf the Keynesian consumption function were C = 2,000 + 0.75YD , what would the value of the tax multiplier be, and how much would equilibrium $output/$income, Y, change if taxes were decreased by 200? Group of answer choices A) Tax multiplier = - 4 ; change in Y = + $160 B) Tax multiplier = - 5 ; change in Y = + $1,000. C) Tax multiplier = - 4 ; change in Y = + $800. D) Tax multiplier = - 5 ; change in Y = + $4,000. E) Tax multiplier = - 3 ; change in Y = + $600.arrow_forwardSuppose the following data for an economy; a consumption function of C = 800 + 0.8Yd, Investment spending is fixed at 300, Government purchases are 400, and net taxes are 100. What is the MPC, MPS, and the value of the tax multiplier? Calculate the equilibrium level of income (Y)? Suppose government increases taxes by 100, use the corresponding multiplier to calculate the new equilibrium level of income. Check to ensure that the multiplier worked (confirm algebraically that your answer in c. is correct, that is, solve for the new equilibrium level of income (Y)).arrow_forward
- Suppose the households in a hypothetical economy has the following consumption function C = 1200+ 0.85Y d Where Y, is the disposable income. The government in this economy imposes a tax d rate of 0 < t < 1 to households' income (ex. A t = 0.10 means that 10% of households' income goes to tax payments). a. What is the level of consumption if Y = PhP 15, 000 and tax rate is at 12%? 1 b. What is the value of multiplier in this economy? (Hint: It is no longer 1-c C. What is the value of tax multiplier in this economy? d. By how much will equilibrium income in the goods market increase if the government decides to increase its purchases by PhP 13,500 ? Assume that the tax rate is still 12%. Can government expenditure help increase output in the economy ?arrow_forwardAssume that the economy is in a severe recession with a high level of under-utilized capacity. The estimated overall consumption function is: C = $150 million + 0.9 Y The government estimates that a $180 B increase in Aggregate Demand is necessary to restore the economy to a full-employment level of output. It determines that the best way to do achieve this is through fiscal stimulus. If the government wanted to maintain a balanced budget, would it be able to stimulate the economy through fiscal policy actions? How could it do this?arrow_forwardScenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Suppose the government repeals a previously existing investment tax credit. Shift the appropriate curve on the graph to reflect this change. The repeal of the previously existing tax credit causes the interest rate to Scenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defense spending without changing taxes. This change in spending causes the government to run a budget Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to and the level of saving to I which the level of investment spending. national saving.arrow_forward
- Suppose that the government of Uplandia is experiencing a large budget deficit with fixed government expenditures of G=375 and fixed taxes of T= 225. Assume that consumers of Uplandia behave as described in the following consumption function C = 450 + 0.96 (Y - T). Suppose further that investment spending is fixed at 300. a. Calculate the equilibrium level of GDP in Uplandia. Solve for equilibrium levels of Y, C, and S. b. Next, assume that the National Congress in Uplandia succeeds in reducing taxes by 89 to a new fixed level of 136. Recalculate the equilibrium level of GDP using the tax multiplier c. Solve for equilibrium levels of Y, C, and S after the tax cut and check to ensure that the multiplier worked.arrow_forwardSuppose that autonomous consumption (a) is 300, private investment spending(I) is 420, government spending (G) is 400 , Net taxes (T) are 400 and marginal propensity to consume (b) is 80 %, and marginal tax rate (t) is 25 % . By using the above information which is also given in my graph: Suppose that the potential income level is 2500 in the economy. In this case, what kind of fiscal policy you can use to reach the full employment level. (show this numerically and explain it on the graph i sent Thanks in advance)arrow_forward6. Assume a closed economy with exogenous investment I and government spending G. The consumption function is as follows: C = a + bYa where Ya is households' disposable income. But instead of a head tax the government levies a proportional income tax, with the income tax rate given by t where 0 < t < 1. a) What is the new expression for disposable income? b) What is the new expression for the consumption function? c) What is the equilibrium level of output Y? d) What is the government spending multiplier in this case? (Hint: It's the derivative of income Y with respect to G.) e) Is this multiplier smaller or larger compared with the multiplier with a simple head tax T?arrow_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