Question

An economy is initially at full employment, but a decrease in planned investment spending (a component of autonomous expenditure) pushes the economy into recession. Assume that the mpc of this economy is 0.75 and that the multiplier is 4. LO4, L05) a. How large is the recessionary gap after the fall in planned investment? b. By how much would the government have to change its purchases to restore the economy to full employment? c. Alternatively, by how much would the government have to change taxes? d. Suppose that the government's budget is initially in balance, with government spending equal to taxes collected. A balanced-budget law forbids the government from running a deficit. Is there anything that fiscal policymakers could do to restore full employment in this economy, assuming they do not want to violate the balanced-budget law?

Answer 1

ment. Aggregate planned An economy is pnitially at full Employment. Aggregate ! expenditure is total planned on all final good and se Produce in the economy in a year. of 1. The consomption and net or components in the economy four components a in the economy exports. aggregate investment are spending expenditure government @ The formula amolo for Po for planned planned agregate expenditure y follows PAE EC +1 +61 + x Here, C es consomption ie ( 2+0.95 (4-1) Iis Prvestment GP's government purchase NX is wel exports, and

As molliplayer for government 4, So / intreaga wuchoses purch CDP by 4*, 6 government © The molhiplier for toy the tax to be decreases by 1 2 3 The multiplier fox tay 8.3. so it Prcrease unop by AX, @ The government spending taxes also has to be prese vernment Spending was creased by x and then • has to be procesed by Y to maintain the balance budget now the multiplayer for G is u I that of I is so overall effect on Goo will be - as follows 24xX-3 xX GOA is of only restoring in cop So overall increase potential oop 10