Question

An economy is described as follows: C-100 + 8Yp + .05 X 150 G 300 . I 200 T2X IM - 100 + .147 nominal wealth and is fixed at 1.000 throughout the problem. All other symbols have their usual meanin Part I. Let P1 A. Find equilibrium GDP, the budget deficit or surplus and the trado deficit or surplus.. B. Now suppose the tax rate is cut so that T = .0757 . . with P still fixed at 1, find the new equilibrium GDP, budget deficit or surplus and traide deficit or surplus. Explain how the tax decrease allocted each of these thren variables. Part II . Suppose that prices vey.. A. Using the original data, including T-2Y, what is the aggregato demand function? Suppose the aggregate supply fimction is : 500 Y - 2100 - - B. what is the equilibrium price level and incomo? Now suppose the tax rate is cat so that T-.075Y. . Using the aggregato supply function . 500 what is the new equilibrium income? what is the fiscal budget deficit or surplus? what is the trade deficit or surplus? deficit or surplus Part I. Supposo wo take the supply aldera assumption that cutting taxes will increase aggregate supply (As well As aggregato demand) You are given a noy As function. . 500 ...Y - 2200 - 500t - - Noto that when t.2, then this As fiction has the same value as AS in the provious section) Now.cut teoxes to t-075 again

Answer 1

1 In eduilibrium atore ye+ I +G + (x - Imt z 100+ 0.8 (Y-T) + 0.05 x 100 +200 + 300 + (150 - 100 - 0.144) 2.700 +0.8 (Y-0.27 ) - 0.144 0.57 2 700 7 = 1400 .. T = 0.2 x 1400 = 280 t atoo Im = 100 + (0.14 x 1400) = 296 @ = 100 + 0.8 (y-7) + 0.5 x loro - 2100 + 0.8 ( 1400 - 280) + 500 281.2 14 96 A) {duilibrium COP is 1400 watt Budget de fieit / surplus & 6-1 = 300 - 280 220 as G-170 est : budget defieit Prade deficit / surpeers - x - 1m = 150-296 2 – 46 any - Im to X <im : Trade defieit

B. Now T= 0.075 Y vi in eduilibrium 72 et It ca + (x-1m) Y = 100 +018 (Y-T) +0.05x 1000 + 200 + 300 Crno - 0 - 0 + (150 - 100 -0.144) wat ois Coy - 0:0457) + 50 + 500 + 50 -0.14 00F 0.4% = 700 Ya 1750 OUT T: 01075 X 150 2131.29XSLOT 1m = 100 + (0.1481750) - D50 342 m toa : įduilibrium CDP is 1750 Budget brorso a defreit / surplus a (a -T) = 300 - 131.25 PNL 2168.75 : Budget tocado de fieit god muindi suho trade defieit / surplus fx-1m) 150-2850 2 - 195 frade deficit : As tax rate cut disposal income imerease so aggregate demand eme rease. By this effeer real GDP sme reasee.

oveo om Decrease in tax rate decrease the revenue from tan so budget deficit inereases. As aggregate demand increases import has to be increased to mer the inerease demand so trade inereases. part 1 - 72 et Ita + (x-im) Nero +0.81 y-029) + 0.05 X 1000 200 +300+(150 - 160 - 0.144) 0.5 Y = o 650+ 50/ Ye 1300 + 100 i aggregate demand funesion is TY1300 + 100 l in efeuilibrium 1300 + 100 = 2100 - 500 Com - 800 p= 0.75 Y - 1433.33