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THE AGGREGATE EXPENDITURE MODEL (IN THE SHORT RUN) YOU MUST SHOW YOUR CALCULATIONS IN THE SPACE...

THE AGGREGATE EXPENDITURE MODEL (IN THE SHORT RUN)

YOU MUST SHOW YOUR CALCULATIONS IN THE SPACE BELOW
FOR THE NEXT PROBLEM USE THE FOLLOWING FORMULA:
CHANGE IN GDP = [ - MPC / (1-MPC) ] * CHANGE IN T
Initially, the economy is producing well below the level of potential output of $16 trillion in goods and services. Also, currently net taxes is $2.6 trillion.

According to precise government’s estimates, the government believes that by reducing net taxes to $1.7 trillion the economy will achieve full employment. a) What is the value of the net taxes multiplier? (3 POINTS) b) Could you compute the initial level of output in the economy? (7 POINTS)

Assume that the marginal propensity to consume is 0.7 (MPC=0.7).

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Answer #1

MPC Ay = x AT 1- MPC D4 Change in Gbp AT Change in Taxes MPC 0.7900Y as DY DT - MPe i 1-MPL T oot blodnd xs - o:7 Duum to. 1QM) O.7 o.3 Value a Net tax multi puer DY -7/3 3 DT .4019(b) ase qtuun, we T 17- Q.6 -0.9 Se get, - o.7 x - 0.9 1-0.7 O.63 o 3 c $ 2.1 toillisbn And also u Rnow, DY final DP Inihial

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