Question

Suppose the government raises its revenue by a net tax of 35 percent on income, t = 0.35. The marginal propensity to consume out of disposable income is 0.85 and the marginal propensity to import is 0.25. Note: Keep as much precision as possible during your calculations. Your final answer should be accurate to at least two decimal places. a) What is the slope of the AE function? What is the size of the multiplier? Slope of AE = 0 Multiplier = 0 b) Autonomous expenditure by the household and business sectors (C + 1) is 400, government expenditure is 400, exports are 50 and imports are 40. What is the autonomous expenditure and equilibrium output? What is the government's budget balance? Autonomous Expenditure Equilibrium Real GDP Government Budget Balance = 0 = 0 = 0 c) The government increases its expenditures by 140 to provide additional funding for national defense. What is the effect on equilibrium income and output? What is the effect on the net tax revenue? Equilbrium income (Select here) by 0 and the net tax revenue (Select here) by 0 d) What is the government's new budget balance? Government New Budget Balance = 0

Answer 1

Answer 2

Answelt from the question we have , 2 met tane of 35% on income t = 0.35 disposal income QC -0.85 & marginal propensity to import m = 0.25 . (a) We know that c=6 ta yo =Cota (y-ty = Cota (1-t) y =6+0,85 (1-0, 35) y =6+0.85) (0.65) y

c=6+ 0.55Y Here c es denoted as Consumption Co-Autonomous Consumption Yo - disposal income , M = my M = 0.25 7 m = 0.25 We know that A Aggregiate expenditure À AE: C+ Go + I + (x3 -M) Hell To - investment Go - Government Spending % - imports X

- b c(1-t) Y + G + 7 +x_my ( -xo) + c(1-t)y my AE + I + x + 0 - E - (+ 6, 7, 1%)+ c 2-t) - Y . slope of AE Line = JAE dy = c(1-t)-m " slope of At Line = 0.55-0.25 = 0.30 Next, multiplier a Ду OA Huu Á - Autonomous Expenditure

At Equillibrium me =Y =y= [60+60 +2** ] + [cc-4)-m]> A = Cot Go +I+X | :y= A + [CCI-E) -m} } - [CCH+)-m]Y= 4 - fea1-e ) - А 1 multiplier edy JA Ć te (int)-m] I - 0.30

0.70 multiplies = 1.92 AEE 0.30 ģ size of the multipher= 1.000 (b) That, question, from the ginen Autonomacy Expenditure by house hold & burines Sutors (C+1) = 400 government Expenditure 66-400 - 50 xo Exports are imports 40 Mo M = 40+ 0.4 y

We know that AF =+ xo ( + 6 +5, + x - y + c(t-1)) - 1 ) Atonomocy Expenditure À = Cot It Go + % - Mo 400+400 + 50 -40 =810 Z Equillibrioms output whey ĤE=Y : *= A +[c.CI-E)-m] y ý (1-(Cl-) - m -- - A A * 1660-1)-m 810 i-0.30

810 a 0.70 Y у 1157.14 Government Budget Balance = TEG To ty = 0.35 x 1157.14 T = 404.99 G=400. Government Budght Balance 404.99-400 = 4.99 ... Government Budget Balance is in surplus.

Atonomous Expenditul = 810 = 151.14 Equillibrum output Gout Budget balance = +4,99 (surpley) (C ) from the question, govt increasy its Expenditures by 140 G' G = Go Go +140 = 400 +140 =540. 1 A = 810+ 140 i 950 New equillaboium output A # A 950 12 Y у 070 0.70

Y yang a 1357.14 Equilliforium output increases by = Y, -Y = 1357.14 1157.14 - 200 : T - New tax perence q' = t.yt 1357.14 0.35 X 8 t'. 474.99 T'T - ... Tax Revence increases by =Q 238 474.99-404.99 = 70

cd) Government New Budgut Balance = T'Gl = 474.99-540 = -65,86 Government New budgut balance is in 65.86 deficit by C