share a Zoom Slideshow Draw Edit National income (Y) (Sbn) 30 60 90 120 150 180
ID: 1106186 • Letter: S
Question
share a Zoom Slideshow Draw Edit National income (Y) (Sbn) 30 60 90 120 150 180 210 240 270 300 20 40 60 80 100 120140 160 180 200 (a) Assuning that the govemment is currently spending $20bn, what is the equilibrium level of Consumption (C) (Sbn) national income? (b) Assuming that at this level of national income the govemment is nunning a budget deficit of S5bn, what must be the level of saving in this economy? (e) What is the govemment expenditure mmultiplier? Assume that fiull employment is achieved at a national income of S240bm. (d) What is the size of the deflatipary gap?. (e) How nuch would govemment expenditure have to be raised (assuming no change in tax rafes) in order to close this gap? (0) Altematively, how much would taxes have to be changed (assuming no change in govemment expenditure) in order to close this gap 2. Give three problems of using fiseal policy to achieve a precise level of national income.Explanation / Answer
A) If we add 20b in consumption for each level of national income, we find that C + G = Y = 60 is the equilibrium. Hence income at equilibrium is 60.
B) National saving = Public saving + Private saving . Public saving = T - G where we have -5 = T - 20. This gives taxes = 15b
Private saving = Y - T - C = 60 - 15 - 40 = 5b
Hence National saving = -5 + 5 = 0
C) Multiplier = 1/MPS. Here income is increased by 30, consumption is increased by 20 and saving is increased by 10. Hence MPS = 1/3. Multiplier = 1/1/3 = 3
D) When Y = 240, C + G = 160 + 20 = 180 so deflationary gap is 60b.
Government spending multiplier is 3. So it needs to increase G by 60/3 = 20b
Tax multiplier = -MPC/MPS = -2/3/1/3 = -2
Hence tax should be cut by 60/2 = 30 billion
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.