Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
7th Edition
ISBN: 9780134472669
Author: Blanchard
Publisher: PEARSON
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Question
Chapter 3, Problem 4QAP
a)
To determine
To find: Increase in Y due to 1 unit increase in G
b)
To determine
To find:Increase in Y due to 1 unit increase in T
c)
To determine
To find:Reason for difference I part (a) and (b)
d)
To determine
To find:Changes in equilibrium GDP ad whether they are economically neutral or not.
e)
To determine
To find:Changes in part (a) due to changes in propensity to consume.
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3. The balanced budget multiplier
For both political and macroeconomic reasons, governments are often reluctant to run
budget deficits. Here, we examine whether policy changes in G and T that
maintain a balanced budget are macro economically neutral. Put another way, we
examine whether it is possible to affect output through changes in G and T so that
the government budget remains balanced.
Start from equation (3.8):
Y=k, +i+G-c7]
1-G
a. When G increases by one unit, Y increases by,
b. When T increases by one unit, Y increases by
Suppose that the economy starts with a balanced budget: G =T. Suppose that Gand
T increase by one unit each. Using your answers to (a) and (b), the change in
. Is balanced budget changes in G and Tmacroeconomically
Y equals_
neutral? (yes or no)
The economy of a country is characterized by the following equations:
Aggregate consumption function C=100+0.50 (Yd), where Yd is the disposable
income. Total taxes T=100, aggregate investment I= 100 and government
expenditures G=100. What can be said about the budget about this country?
O The balanced budget multiplier is greater than 1.
The budget of the country is balanced.
We cannot say anything about the budget.
The country has a budget surplus.
The country runs a budget deficit.
C is consumer expenditure
T is tax revenue
Y is aggregate output
I is investment expenditure
r is interest rate
G is government expenditure
L is money demand
M is money supply
Derive the relevant matrix inverse (do not use Cramer's rule) to solve for the equilibrium level of income in
terms of government expenditure (G). At what level of public spending does the government balance its
budget? (Hint: the endogenous variables are Y and r).
Chapter 3 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
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