Question 3 (10 points)

THE AGGREGATE EXPENDITURE MODEL (IN THE SHORT RUN) YOU MUST SHOW YOUR CALCULATIONS IN THE SPACE BELOW FOR THE NEXT PROBLEM USE THE FOLLOWING FORMULA: CHANGE IN GDP = [ - MPC / (1-MPC) ] * CHANGE IN T Initially, the economy is producing $13 trillion in goods and services and net taxes is equal to $3 trillion. Moreover, potential output is $15 trillion.

a) What is the value of the net taxes multiplier? (3 POINTS)

b) What is the new value of net taxes that will make the economy reach full employment? (7 POINTS) Assume that the marginal propensity to consume is 0.8 (MPC=0.8).

Your answer:

Question 4 (10 points)

THE AGGREGATE EXPENDITURE MODEL (IN THE SHORT RUN) YOU MUST SHOW YOUR CALCULATIONS IN THE SPACE BELOW FOR THE NEXT PROBLEM USE THE FOLLOWING FORMULA: CHANGE IN GDP = [ - MPC / (1-MPC) ] * CHANGE IN T Initially, the economy is producing well below the level of potential output of $16 trillion in goods and services. Also, currently net taxes is $2.6 trillion. According to precise governments estimates, the government believes that by reducing net taxes to $1.7 trillion the economy will achieve full employment. a) What is the value of the net taxes multiplier? (3 POINTS) b) Could you compute the initial level of output in the economy? (7 POINTS) Assume that the marginal propensity to consume is 0.7 (MPC=0.7). Your answers to the following questions will be assessed based on how you support your answers and how you present your ideas (ideally, in a well structured way). For me, it is more important the quality of your answer than its quantity (how much you write. However, follow the instructions). You are expected to use the economic concepts that we have used in class.