Question

d ises by $300. falls by 5900 se acconomy -.1 -Io, and 30, and Suppose an economy has following information C- C YYY- Tlo, and 6 -Go where C-135, -0.8, lo -75, Go - 30, and T O 3. The equilibrium level of income of the above economy 1 A) 1.200 B) 1.250 C) 1,300 D) None of above kes and spend the $100 (i.e, government budget 6. IT MPC is 75 and government collects $100 taxes and spend the is balanced), the increase in GDP is A) O B) S100 C) $400 D) None of the above 7. Which of the following would shift the FE line to the right? A) An adverse supply shock B) An increase in labor supply C) A decrease in the capital stock D) An increase in the future marginal productivity of capital 8. The IS curve shifts when all of the following variables change except a. tax rates. b. interest rates. c. government spending. d. Investment e. both b and d. 9. An increase in the money supply would cause the FE line to A) shift to the right. B) shift to the left. C) remain unchanged. D) remain unchanged if Rieardian equivalence holds; otherwise, shift to the right. Answer: C N

Answer 1

5. At equilibrium, Y = C + I + G

Or, Y = C0 + b (Y - T) + I_{​​​​​​0} + G0

Or, Y = 135 + 0.8(Y - 0) + 75 + 30

Or, Y = 240 + 0.8Y - 0

Or, Y - 0.8Y = 240

Or, 0.2Y = 240

Or, Y = (240/0.2) = 1200

Answer: option A

6. Government expenditure multiplier = 1/(1 - MPC) = 1/(1 - 0.75) = 1/0.25 = 4

Tax multiplier = -MPC / (1 - MPC) = -0.75/0.25 = - 3

Change in Y = change in tax * tax multiplier

Or, Change in Y = $100 * (-3) = -$300

That is, if government collects $100 tax, that will decrease GDP by $300.

And, change in Y = change in government spending * spending multiplier

Or, change in Y = $100 * 4 = $400

That is, $100 increase in government spending will increase the GDP by $400.

Therefore, overall change in GDP is an increase of ($400 -$300) = $100.

Answer: option B