Question

h) Suppose taxes are cut to .18Y. What would happen to the equilibrium level of income in this economy (how much would it change)? 4) Suppose that there exists an economy, Macroland, which is characterized by the following behavioral equations C=-340+.9Y I= 2007.14 G = 2200 T= 2Y X = 1100 Q = 300+.1 Yd Ya=Y-T. Note that taxes and investment are based on total income (Y), not on disposable income (Y). a) Find an expenditure function relating expenditures (E) to real GDP (Y) b) What is the simple spending multiplier in Macroland? i) What are total tax revenues now? Has this tax cut been self-financing? c) What is the equilibrium condition for the goods market? d) What is the equilibrium level of output/income that clears the goods market? j) Following this tax cut, what is the government's new deficit or surplus? e) Is the government running a deficit or surplus, and of how much, at the equilibrium level of income? k) Following the tax cut, find the new trade balance? Has the trade balance improved or deteriorated? f) At the equilibrium level of income, what is the consumption/GDP ratio? How does this ratio compare with the actual ratio in the US? g) Is there a trade surplus or deficit and of how much?

Answer 1

E = E = c + I + G + x - a - 340 + 0.9 Ya + 200 +0:18 + 2200 + 1100 - 300 -0.1d E = 2860 + 0-9 Yd - Olyd + 0.ly E= 2860+ 0.87d tooly E = 2860 + 0.8 [ Y-T) tooly = 2860 + 0.814 -0242 +0oY = 2860 t 0.880.89 tooly = 8860 + 0.64 y tooly E = 2860 € 6.744 b) simple multiplier b= d = o.g 0.1 t = 0.2 multiplier = Į - 6(l-t) +dCi - t) - C 1-oog (1-0.2) tool(1-0.2 -o-1 1 -0.9x0.8 +0lX0.8 -0.) 1- 0.72 +0.08-ord L 0.26 = 3.84

c) for goods Equilibrium market condition is y = E or C+ I+ G+x - a y = 2860+ 0.749 Y-0.74 y = 2860 0.264 = 2860 y = 2860 0.26 y = 1000 G= I = 2200 0.24 0.2(11000) = = 2200 budget deficit = G-T = 2200-2206 or which these deficit or means budget is balanced Gout is running neither supplier in budget