ECON 201 Lecture Notes - Lecture 20: Balanced Budget, Output Gap, Keynesian Cross

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erinsea-lion256

14 Feb 2017

School

Department

Economics

Course

ECON 201

Professor

Daisoon Kim

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Document Summary

Econ 201 lecture 20 intro to fiscal policy & multipliers. Let"s return to the full income accounting identity: y = c + i + g + nx. In equilibrium: y + c(yd) + iplanned + g+ nx, y = a + mpc(y t) + iplanned + g+ nx, solve this, g and nx just get added to aggregate expenditure, consumption now depends on taxes. Basically, the government can affect aggregate spending (ae) through spending (g) and taxes (t) Aeplanned = c(y t) + iplanned + g+ nx: cutting taxes will increase consumption, shifting ae up, this is fiscal policy. Taxes: personal income taxes, corporate profit taxes, social insurance taxes, other taxes. Government spending: national defense, education, other goods and services, social security, medicare and medicaid, other government transfers. Social insurance programs: government programs intended to protect families against economic hardship. This is all welfare-enhancing: bring resources into use and increase output, protect people from negative consequences of unemployment.

Related Questions

tealalligator726

Given the following information for the Macro Economy answer the following questions.

In this economy we have an MPC equal to 0.80, Autonomous Consumption of $600 billion, Planned Investment (I) of $1,000 billion, Government Spending (G) of $1,200 billion and Net Taxes (T) of $1,000 billion.

a) Fill in the missing data for: T, Yd, C, S, and AE (in that order in a table) for every level of Y given below (all the numbers are in billions).

Income (Y) Net Taxes (T) Disposable Income (Yd) Consumption (C) Savings (S) Aggregate Expenditures (AE)
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000

b) Determine the Equilibrium level of Aggregate Income (Ye). Please state the reason for your answer.

c) Calculate the Spending Multiplier (show how you got your answer).

d) State in one sentence what your answer in (c) above tells us about any decrease in spending that takes place in the economy.

e) If this economy had a full employment level of income equal to $8,000 billion, what Macroeconomic condition is this economy experiencing.

f) Using the Spending Multiplier, determine the change in G that is needed to get this economy to be in equilibrium at full employment. Please show your work.

g) Using the Spending Multiplier, determine the change in T that is needed to get this economy to be in equilibrium at full employment. Please show your work.

cerisesnake32

10.

The long-run aggregate supply curve (LRAS) is Y = Yf, which depends on the amounts of resources and the level of technology innovation. If a country has more resources and better technology, which of the following is true?

		A. The LRAS curve will shift to the right.
		B. The SRAS will shift to the right.
		C. The SRAS will shift to the left.
		D. Only A and B.
		E. Only A and C.

11.

Suppose the wage rates of workers are based on the expected price level. If there is an unexpected increase in AD, it will cause the actual price level to increase. Then workers should raise their expected price level and negotiate a higher wage rate. Then which of the following is most likely to be true when the expected price increases?

		A. The SRAS curve will shift rightward.
		B. The SRAS curve will shift leftward.
		C. The LRAS curve will shift leftward.
		D. Only A and C.
		E. Only B and C.

12.

Suppose the economy is in the long-run equilibrium, i.e., Y = Yf, and there is an unexpected decrease in AD. Assume that Yf is fixed, then which of the following is most likely to be true?

		A. The SRAS curve will shift to the right toward the new long-run equilibrium.
		B. The SRAS curve will shift to the left toward the new long-run equilibrium.
		C. In the new long-run equilibrium, price level will be higher.
		D. Only A and C.
		E. Only B and C.

13.

The short-run (SR) equilibrium is the intersection between AD and SRAS, and long-run (LR) equilibrium is the intersection between AD and LRAS. Every LR equilibrium is a SR equilibrium, but a SR equilibrium is not always the LR equilibrium. If an economy is operating at a SR equilibrium where Y > Yf, which of the following will occur in the process toward the new LR equilibrium when the economy corrects itself?

		A. Price increases.
		B. Real GDP decreases.
		C. Unemployment rate falls.
		D. Only A and B.
		E. Only B and C.

14.

From the Keynesians, Y = C + I + G + NX can be transformed into a theoretical model. In particular, assume that the consumption C = A + mpc (Y-T), where A is a constant, mpc is the marginal propensity to consume, Y is national income and T is income taxes. Suppose in the goods market equilibrium, aggregate expenditure = national income such that the two Y's will be the same from Y = A + mpc (Y-T) + I + G+ NX. . Suppose C = 400 + 0.75(Y â T). G = 100, I = 100, T = 100, and NX = 150, what is the Y in the goods market equilibrium? (All of the variables are in terms of million dollars)

$ million
Please enter a whole number, with no decimal point.

15.

Continue to assume that C = 400 + 0.75 (Y - 100), I = 100, and NX = 150. But the government now increases spending from 100 to 200, how much is the new Y in the goods market equilibrium?

$ million
Please enter a whole number, with no decimal point.

16.

Continue to assume that C = 400 + 0.75 (Y - 100). Then which of the following is true?

		A. The government spending multiplier = 4.
		B. The tax multiplier = 3.
		C. If the government increases spending by $50 million, and at the same time increases taxes by $50 milion to balance the budget, AD will shift to the right by $50 million.
		D. Only A and C.
		E. Only B and C.

17.

Suppose the federal government needs to balance the budget, which means that when the government spending increases, taxes must increase equally. In this case, government spending multiplier is called the balanced-budget multiplier, defined as the increase in real GDP/increase in government spending. By following the example from the previous question, how mcuh is the balanced-budget multiplier?

Please enter a whole number, with no decimal point.

pearseal539

ECON 201 Lecture Notes - Lecture 20: Balanced Budget, Output Gap, Keynesian Cross

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