MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 9.A, Problem 2TY
To determine
To calculate: The equilibrium level of
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In a closed economy, what determines consumption, investment, and government
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Problem 1:
You are given the following model for the economy of a country:
Consumption function: C=2000+0,75-YDI
Investment function: I=10500
Government spending: G = 12000
Tax function: T=200+0,4·Y
- Disposable income: YD = Y -T+TR
Transfer: 1000
a) What is the level of equilibrium output?
b) What is the new equilibrium output if investment decreases by 2 000 units?
c) How much does the government collect in taxes when the economy is in equilibrium?
d) What is level of the government’s budget?
e) Calculate the tax multiplier?
f) Calculate consumption at the equilibrium output.
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Similar questions
- Suppose that the consumer’s consumption demand function is given by Cd = 0.8(Y−T)+10. Investment is Id = 20, government expenditure is G = 10, and tax is T = 10. What is the equilibrium GDP (income)? Suppose that government expenditure increases by 10 units while tax is unchanged. How will GDP change? What is the multiplier? Suppose that government expenditure increases by 10 units while tax also increases by 10 units. How will GDP change? What is the multiplier?arrow_forwardQuestion 17 In early 2000, China was the fastest emerging economy in Asia. However, in recent years, China has indicated deteriorating growth beginning of 2020. Suppose consumption function for China is C = 250 +0.6(Y-T) and taxes are T = 15+0.05Y, meanwhile investment is 250, government outlays are 400, and net - export is 300. a) What is the multiplier value for China? b) Suppose China's investment has dropped to 200, government outlays received deduction from the budget by 25% and other components are ceteris paribus. Calculate the national equilibrium new national income equilibrium. c) From the changes that happened in (b) China has reaccelerated export and import activities. This sector has contributed another $100 for net-export, meanwhile other components are ceteris paribus. Calculate national income equilibrium using multiplier approaches.arrow_forwardConsider the hypothetical country of Kejimkujik. Suppose that national income in Kejimkujik is $300 billion, households pay $100 billion in taxes, household consumption is equal to $160 billion, and the marginal propensity to consume (MPC) is 0.6. On the following graph, use the blue line (circle symbol) to plot the economy's consumption function. Consumption Function050100150200250300350400450500500450400350300250200150100500CONSUMPTION (Billions of dollars)DISPOSABLE INCOME (Billions of dollars) Suppose now that Kejimkujik’s national income increases to $330 billion. Assuming the amount paid in taxes is fixed at $100 billion and that MPC = 0.6, what is the new amount of household consumption? $148 billion $219.4 billion $220.6 billion $178 billionarrow_forward
- Assume taxes are zero and an economy has a consumption function of C = 0.89 (Yd) + $299.19. How much consumption takes place if disposable income is equal to 4,848.76? Round your answer to two digits after the decimal.arrow_forwardIn a closed economy, GDP is $1000, government purchases are $200, consumption is $700 and the government has a budget surplus of $25. Using the given information calculate: a) investment, b) taxes, c) public saving.arrow_forwardConstruct a consumption function from the data given here and determine the MPC. Given the consumption function in the above question, what is the relationship between disposable income and consumption?arrow_forward
- Assume that Consumption is C = c(Y-T); Taxes T = tY; Investment / = -bi; and Government expenditure (G) is exogenous. Determine the multiplier for an increase in the tax rate.arrow_forwardThe following are exogenous (not directly affected by income): G = 11 I = 4 X = M = 0 The consumption function is: C = k + cY, where k = 3, c = 0.8 What is the equilibrium level of GDP? What is the multiplier?arrow_forwardConsider an economy described by the following:Autonomous consumption ( a ) = 100Autonomous Investment = 100Marginal propensity to consume = 0.75 What is the savings function for this economy?arrow_forward
- b) With an example, elaborate the consumption functionarrow_forwardAnswer the question on the basis of the following consumption schedule: C = 50 + .75Y. The level of disposable income is $400. What is the MPC of this economy?arrow_forwardConsider an economy described by the following:Autonomous consumption ( a ) = 100Autonomous Investment = 100Marginal propensity to consume = 0.75 2. What is the consumption function for this economy?arrow_forward
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