Question.3189 - Suppose for a closed economy (no import or export) , the autonomous consumption (AC) =500, MPC=0.9, and suppose that the investment I =300, Government spending G= 400 and tax =400 A.) Write the specific consumption function: C= and write the aggregate demand function AD= B.) Write the equation to describe the market in equilibrium:C.)What is the GDP – Ye in the equilibrium? D.) If the potential GDP Yp= 8000, and the government decided to use fiscal policy (increase government expenditures) to increase the GDP to its potential level. With the multiply effect, how much government spending should be increased so to bring the economy back to full employment GDP? E.) If the government did conduct the expansionary fiscal policy to raise the GDP, how will the government budget change. F.) If the government decided to use fiscal policy to cut tax, thus to stimulate the economic growth. How much tax should it cut to bring the GDP to its potential full employment GDP- Yp=8000? Which fiscal policy is more effective and efficient without serious side effects? Explain it.
Answer Below:
Given xxxxxxxxxx consumption xx MPC xxxxxxxxxx I xxxxxxxxxx spending x tax x The xxxxxxxxxxx function xx given xx following xxxxxxxx C xx C x Y x Y xxx aggregate xxxxxx function xx given xx the xxxxxxxx Y x I x Y x Y x hellip xxxxxx hellip xxxxxx hellip xxxxxx hellip xxxxxx hellip xxxxxx hellip xxxxxx hellip xxxxxx hellip x The xxxxxx equilibrium xx given xx Y x C xxxxxxx equation x Y x Given x p xxx government xxxxxxxxxxx multiplier xx - xx dG xx the xxxxxxxx in xxxxxxxx in xxxxxx dy xx times xxx increase xx government xxxxxxxx dG x If xxx government xxx not xxxxxxxxx the xxxxxxxxxxxx fiscal xxxxxx the xxxxxx would xxxxxx if xxx only xx investment xxx not xxxxxxxxxx That xx investment xxxx would xxxx to xx a xxxxxxxx of xxxxxxxxx demand x I x the xxx multiplier xxxx be x - x - xx dT xx the xxxxxxxx in xxxxxxxx in xxxxxx dy xx times xxx increase xx taxes xx Government xxxxxxxx is xxxx effective xx increase xx the xxx level xxxxx reduce xxx disposable xxxxxx of xxx economy x similar xxxxxxxx in xxx government xxxxxxxx would xxxxxxx increase xxx aggregate xxxxxx in xxx economyMore Articles From Economics
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