Answered step by step
Verified Expert Solution
Question
00
1 Approved Answer
Suppose in the economy autonomous consumption $100, autonomous investment $120, E I I : government purchases _ $400, lump-sum taxes .' J = $70, transfers
Suppose in the economy autonomous consumption $100, autonomous investment $120, E I I : government purchases _ $400, lump-sum taxes .' J = $70, transfers _ $20, exports _ = $150, G : T5: Tr : Ex autonomous imports _ = $30, marginal propensity to consume mpc = 0.8, proportional income tax Im rate t = 20%, marginal propensity to invest mpi = 0.1, and marginal propensity to imports mpm = 0.14. (a) For this economy calculate: (i) the amount of autonomous spending; (ii) the value of the spending multiplier; (iii) the equilibrium level of output; (iv) the government budget (does government run budget deficit or budget surplus?) (b) Suppose the full-employment level of output equals $1800. Is there a recessionary or an inationary gap in this economy? What type of fiscal policy is needed in this case?I (c) By what amount government must change i government spending; or ii lump-sum taxes; or iii transfers to overcome this gap? Give your calculations for each instrument and show the results of the change [compared with the initial situation} on the correctly labeled Keynesian cross graph in the (AE Y) space and on the AD-AS graph in the {P Y] space, putting all the figures from your calculations. (Hint: there must be totally 2 graphs and in the ADI-AS model graph SRAS curve must have a positive slope.) (d) What will be the change in the government budget in each case? Give your calculations. (Hint: Do not forget about tax revenues from proportional income taxes.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started