1. Suppose that the government of Lumpland is enjoying a fat budget surplus with

Question

1. Suppose that the government of Lumpland is enjoying a fat budget surplus with fixed government expenditures of G = 150 and T = 200. Assume that consumers of Lumpland behave as described in the following consumption function: C = 150 + 0.75 (Y - T )

Suppose further that investment spending is fixed at 100. Calculate the equilibrium level of GDP in Lumpland. Solve for equilibrium levels of Y, C, and S. Next, assume that the Republican Congress in Lumpland succeeds in reducing taxes by 20 to a new fixed level of 180. Recalculate the equilibrium level of GDP using the tax multiplier. Solve for equilibrium levels of Y,C, and S after the tax cut and check to insure that the multiplier worked. What arguments are likely to be used in support of such a tax cut?

2. Expert economists in the economy of Yuk estimate the following:

BILLION YUKS

Real output/income 1,000

Government purchases 200

Total net taxes 200

Investment spending (planned) 100

Assume that Yukkers consume 75 percent of their disposable incomes and save 25 percent.

a. You are asked by the business editor of the Yuk Gazette to predict the events of the next few months. By using the data given, make a forecast. (Assume that investment is constant.)

b. If no changes were made, at what level of GDP (Y) would the economy of Yuk settle?

c. Some local conservatives blame Yuk

Explanation / Answer

Consumption function is given as C = 150 0.75(Y

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