Question

QUESTION 1 Suppose that the behavior of households, firms and the government in an economy is determined by the following equations: C-180+0.75Y 1150 G-55 T-90 TWR30 The full employment level of output in the economy is: YFE 1200 Find an expression for aggregate expenditure (This should take the form of AE - abY, where a and b are numbers) il. What is the equilibrium level of output? YE = ill. What is the government spending multiplier in this economy? iv. What is the tax multiplier in this economy? v. Is the government running a budget surplus or a budget deficit? vi. What is the size of the budget surplus/deficit? vil. Suppose that the government wanted to achieve the full employment level of output. By how much would government spending need to increase to get the economy to full employment? vil. Suppose that the government wanted to achieve the full employment level of output. By how much would taxes need to decrease to get the economy to full employment? vil. If government spending increased by 10 (so the new level of government spending were equal to G465), what would the new equilibrium level of output be? YE ix. If, in addition to increasing government spending to G=65, the government also increased taxes by 10 (so the new level of taxes were T=100), what would the new equilibrium level of output be? YE" =

Answer 1

C = 180 +0.75 YO I so Gris T=90 TR= 30 ① AE = CAl that E = 180+0.714-90 +30) +5055 AE = 180 +0.75 +1.50 = 330 tony & YE Ally Y ME Y=330 +0.754 4= 330 - 1320 ③ Gout spending multiplie = - 4 ' 0 i MPC 1-0.75 Gax molteplier = -MPC -0.5 -0.75 -3 0.25 1) Budget Supples-Tax-To-a - 90-30-15=5