Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 27, Problem 1TY
a)
To determine
The graphical representation of the equilibrium of the given economy.
b)
To determine
The marginal propensity to consume.
c)
To determine
The size of multiplier.
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Students have asked these similar questions
Changes in taxes
The following graph plots an aggregate demand curve.
Using the graph, shift the aggregate demand curve to depict the impact that a tax cut has on the economy.
Suppose the governments of two very similar economies, economy B and economy A, implement a permanent tax cut of equal size. The marginal propensity to consume (MPC) in economy B is 0.7 and the MPC in economy A is 0.85. The economies are otherwise completely identical.
The tax cut will have a larger impact on aggregate demand in the economy with the (SMALLER MPC or LARGER MPC).
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?
What is the eventual effect on real GDP if the government increases its purchases of goods and services by $75,000? Assume the marginal propensity to consume (MPC) is 0.75.
$
What is the eventual effect on real GDP if the government, instead of changing its spending, increases transfers by $75,000? Assume the MPC has not changed.
$
An increase in government transfers or taxes, as opposed to an increase in government purchases of goods and services, will result in
an identical eventual effect on real GDP.
no change to real GDP.
a larger eventual effect on real GDP.
a smaller eventual effect on real GDP.
Chapter 27 Solutions
Economics: Principles & Policy
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