Question

DI=4- Tax Homework 3B - problem questions Answer all parts to question 1.2 and 3. Assume transfer payments are zero C = 5000+ 0.2DI G-5000 I= 1000 X=1000 IM = 2000 Taxes = 500 mpus 1-0. 2 J1-0.2 0.9 70.0 mps-1-mpc tmpe = 0.2 14 (nx) G) + . - ) a. How much is MPS (1) as (o (6) + IY b. Calculate current equilibrium GDP (5) AE = 500002 NE TOOD +0:2 (4-1) COD 000 000 - 5600 +0.24-0.25) Abay LAL= 9900 10-2y) $ A JUDOU 201 + 000 - 100 y = 9900+ 0.27 - 0.64 = 9900 g y = 12375! c. How much is disposable income in equilibrium (2) DIT DI = (12375-500) = 11871 d. How much is Consumption in equilibrium (2) e. How much is Savings in equilibrium (2) f. Now assume there is an inflationary gap of 1000, how much is full employment GDP (1) g. How much is the multiplier (1)

Answer 1

1.

A.

MPS = 1-MPC = 1-.2

MPS = .8

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B.

Let, equilibrium GDP = Y

Then,

Y = C++G+I+(X-IM)

Y = 5000 +.2*(Y-500) + 5000 + 1000 + (1000-2000)

Y = 5000 + .2Y - 100 + 5000 + 1000 - 1000

Y = .2Y + 9900

Y = 9900/(1-.2)

Y = $12375

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C.

Disposable income = Y - taxes = 12375 - 500

Disposable income = $11875

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D.

Consumption = 5000 + .2*DI = 5000 + .2*11875

Consumption = $7375

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E.

Savings = Y - consumption = 12375 - 7375

Savings = $5000

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F.

Full employment GDP = Y - 1000 = 12375-1000

Full employment GDP = $11375

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G.

Multiplier = 1/(1-MPC) = 1/(1-.2)

Multiplier = 1.25