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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OUTPUT
Suppose the governments of two different economies, economy J and economy K, implement a permanent tax cut of the same size. The marginal
propensity to consume (MPC) in economy J is 0.85 and the MPC in economy K is 0.8. The economies are identical in all other respects.
The tax cut will have a larger impact on aggregate demand in the economy with the
PRICE LEVEL
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?
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).
Chapter 27 Solutions
Economics: Principles & Policy
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