Question 2: (25 points) Table 1 represents an economy that has taxes and governm
ID: 1186647 • Letter: Q
Question
Question 2: (25 points)
Table 1 represents an economy that has taxes and government spending but is not yet open to trade.
1
2
3
4
5
6
7
GDP
Taxes
DI
C
I
G
C + I+ G
1200
200
..
900
200
300
1400
1450
..
..
1100
..
..
..
1700
..
..
1300
..
..
..
1950
..
..
1500
..
..
..
2200
..
..
1700
..
..
..
2450
..
..
1900
..
..
..
2700
..
..
2100
..
..
..
Taxes in the economy are lump-sum (fixed), so you can easily complete the rest of column (2).
Investment and government spending are both independent of GDP (constant), so you can fill in the rest of columns (5) and (6) as well.
Complete the disposable income entries in column (3).
Calculate total spending for the economy in column (7).
What is the equilibrium level of GDP in the economy?
When the economy is at equilibrium, what is the level of saving? When the economy is at equilibrium, investment should equal saving. Now that the government is included, we have to allow for the possibility of government saving. Government saving is equal to T - G. (If the difference between T and G is negative, then the government is borrowing, or running a deficit.)
Determine if I = S + (T - G) when the economy is at equilibrium.
What is the value of the MPC?
What is the value of the expenditure multiplier?
What is the value of the tax multiplier?
If the government increases spending by $100, what would be the new equilibrium value of GDP?
What economic problem might exist for the government to make this fiscal policy change?
If the government wanted to achieve the same change in GDP as in part k by cutting taxes instead, how large would the tax cut have to be?
1
2
3
4
5
6
7
GDP
Taxes
DI
C
I
G
C + I+ G
1200
200
..
900
200
300
1400
1450
..
..
1100
..
..
..
1700
..
..
1300
..
..
..
1950
..
..
1500
..
..
..
2200
..
..
1700
..
..
..
2450
..
..
1900
..
..
..
2700
..
..
2100
..
..
..
Explanation / Answer
1
2
3
4
5
6
7
GDP
Taxes
DI
C
I
G
C + I+ G
1200
200
1000
900
200
300
1400
1450
200
11250
1100
200
300
..
1700
200
1500
1300
200
300
..
1950
200
1750
1500
200
300
..
2200
200
2000
1700
200
300
..
2450
200
2250
1900
200
300
..
2700
200
2500
2100
200
300
..
DI = Y-T
1
2
3
4
5
6
7
GDP
Taxes
DI
C
I
G
C + I+ G
1200
200
1000
900
200
300
1400
1450
200
1250
1100
200
300
1600
1700
200
1500
1300
200
300
1800
1950
200
1750
1500
200
300
2000
2200
200
2000
1700
200
300
2200
2450
200
2250
1900
200
300
2400
2700
200
2500
2100
200
300
2600
1
2
3
4
5
6
7
GDP
Taxes
DI
C
I
G
C + I+ G
1200
200
1000
900
200
300
1400
1450
200
11250
1100
200
300
..
1700
200
1500
1300
200
300
..
1950
200
1750
1500
200
300
..
2200
200
2000
1700
200
300
..
2450
200
2250
1900
200
300
..
2700
200
2500
2100
200
300
..
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