Question

Myuu Tourer Caicos 25 5. The annual (Initial) GDP of a Simple Open economy is 10,000 units with annual savings (S) of 1000 units and a 20% Tax Rate (T) and a 16% Transfer Payment rate (R). (a) Show and explain the changes on annual GDP, Consumption (C), Savings (S) and Net Taxes (T-R) to an increase in annual Goverment Spending from 1000 units to 1500 units? (b) What would be the change on the annual GDP, Consumption (C), Savings (S) and Net Taxes (T-R) to a decrease in annual Government Spending from 1000 units to 500 units, if initial annual savings (S) increased from 1000 units to 1500 units? Show the table of, and explain your calculations?

need help

Answer 1

In a Simple Open Economy,

GDP (Y) = C + G + I + NX (X-M) where, S = Sgovt. + Spvt. = I ............................................. (At equilibrium)
&, Net Taxes = Taxes (T) - Transfer Payment (R) = Govt.Spending (G)

Savings (S) = Consumption Net Taxes = T-R = NX (X-M) Investment (0) (C) Govt. Spending (G) Y (GDP) = C+1 (=S) + G (= Net Taxes) + NX (X-M) C = Y--G- NX Initially 1000 8000 0 10,000 Tax Rate (T) = 20 %, and, Transfer Payment = 10% 1000 (i.e, 10% of GDP) increases from 1000 to 1500 C=Y- I - G-NX increases from 1000 to 1500 Case (a). 1500 12,000 1500 0 15,000 because Net Taxes (10% of GDP) = 1500 so, 100% (GDP) = 15000 increases from 1000 to 1500 C=Y- I - G-NX decreases from 1000 to 500 Case (b). 1500 3,000 500 0 5,000 because Net Taxes (10% of GDP) = 500 so, 100% (GDP) = 5,000 (i.e, 10% of GDP)