Given the following model: Y = C + I + G + (X-M) Question 1 Suppose that: Autono

Question

Given the following model: Y = C + I + G + (X-M) Question 1 Suppose that: Autonomous Consumption = $500 MPC = 0.75 Taxes = $400 Investment = $500 Government Spending = $1200 Exports = $300 Imports = $500 Find the following: (2 points each) A. Equilibrium income B. Equilibrium consumption C. Equilibrium saving D. Write the savings function E. Show that injections equal withdrawals

Question 2 Suppose that full employment GNP (FE Y) is = 4000 (2 points each) A. Explicitly find the necessary change in G to get the economy to full employment GDP. B. Explicitly find the necessary change in Taxes to get the economy to full employment GDP.

Given the position of the economy in question one and that full employment GDP = 4000 explain how the following monetary policies would get the economy to full employment GDP (1.5 point each) A. Open market operations B. Discount rate C. Federal funds rate D. Required reserve ratio

Explanation / Answer

Ans:

A. Equilibrium income
Y = C + I + G + (X-M)
C = 500 + MPC(Y T)
So,
Y = 500 + MPC(Y T) + I + G + (X-M) = 500 + 0.75(Y 400) + 500 + 1200 + (300500) = 500 + 0.75Y 300 + 1700 -200 = 0.75Y +1700
0.25 Y = 1700
Y = $6800
B. equilibrium consumption C = 500 + MPC (Y-T) = 500 + 0.75*(6800 400) = 5300
C.

equilibrium Savings = Y T C = 6800 400 - 5300 = 1100

D. Savings function is S = Y-T-C =Y T - 500 - MPC(Y T) = Y ( 1-MPC) T(1-MPC)
500 = (Y-T) (1-MPC) - 500
E. Government income = $400 through taxes
So, Government expenditure through other sources = 1200 400 = $800
Net exports = -200

So, actual investment = 500 + 800 200 = $1100
Savings = $1100
So, injections = withdrawls.

Question 2
Suppose that full employment GNP (FE Y) is = 4000 (2 points each)
A. Explicitly find the necessary change in G to get the economy to full employment GDP.
B. Explicitly find the necessary change in Taxes to get the economy to full employment GDP.
A. Necessary changes in G to get economy to full employment GDP
I assume Y =6800 as in Q1
FE GDP= 4000
So we need to reduce by 2800
the value of multiplier= 1/[1-.75] = 4
so e need to REDUCE G by 2800/4=700 to get to full employment level.
B. Necessary changes in Taxes
So we need to reduce by 2800
the value of tax multiplier= -.75/[1-.75] = -.3
so we need to INCREASE T by 2800/3=933.333 to get to full employment level.

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.