Question
IS Function
C=600 + (.7)(1-t)Y
t=.15
I=1500-75(i)
I=6(6%)
G=1000
LM Function
L=.3 Y-65(i)
M/P=900
a. What is the equilibrium income level and interest rate
b. Suppose there is an increase in t from .15 to .20. What will be the change in the equilibrium level of income and interest rate?
c. Suppose there is a decrease in government expenditures (G) from 1000 to 800 what will be the change in the equilibriu, income level and interest rate?
d. Suppose there is an increase in the money supply from 900 to 1200 what will be the change in the equilibrium level on income and interest rate?
e. Today Congress and the President are debating the correct economic policy to raise the debt limit by trying to balance the budget. Here are 3 proposals:
i Cut government expenditures (G) while keeping taxes fixed
ii Increase the tax rate t while keeping government spending G fixed
iii Increase the tax rate t and decrease government spending G
Given your answers in a-e above what policy would you support be implemented. Explain
Question
IS Function
C=600 + (.7)(1-t)Y
t=.15
I=1500-75(i)
I=6(6%)
G=1000
LM Function
L=.3 Y-65(i)
M/P=900
a. What is the equilibrium income level and interest rate
b. Suppose there is an increase in t from .15 to .20. What will be the change in the equilibrium level of income and interest rate?
c. Suppose there is a decrease in government expenditures (G) from 1000 to 800 what will be the change in the equilibriu, income level and interest rate?
d. Suppose there is an increase in the money supply from 900 to 1200 what will be the change in the equilibrium level on income and interest rate?
e. Today Congress and the President are debating the correct economic policy to raise the debt limit by trying to balance the budget. Here are 3 proposals:
i Cut government expenditures (G) while keeping taxes fixed
ii Increase the tax rate t while keeping government spending G fixed
iii Increase the tax rate t and decrease government spending G
Given your answers in a-e above what policy would you support be implemented. Explain
Related textbook solutions
Related questions
|
Income (Y) |
Net Tax (T) |
Disposable Income (YD) |
Consumption (C) |
Saving (S) |
Investment (I) |
Gov. Spending (G) |
Total Expenditure (TE) |
|
10,000 |
1,000 |
1,300 |
2,000 |
1,500 |
|||
|
12,000 |
1,000 |
1,700 |
2,000 |
1,500 |
|||
|
13,000 |
1,000 |
2,000 |
1,500 |
||||
|
15,000 |
1,000 |
2,000 |
1,500 |
||||
|
16,000 |
1,000 |
2,000 |
1,500 |
||||
|
18,000 |
1,000 |
2,000 |
1,500 |
||||
|
20,000 |
1,000 |
2,000 |
1,500 |
a) Fill in the missing values.
b) What is the equilibrium output level?
c) If the current output level is 15,000, what would likely happen to the output level next year? Why?
d) By how much will the equilibrium output level increase (decrease) if the planned investment falls by 500?
e) By how much will the equilibrium output level increase (decrease)if the tax (T) decreases by 400?
f) By how much will the equilibrium output level increase (decrease) if the government spending (G) decreases by 800?
g) By how much will the equilibrium output level increase (decrease) if the government spending (G) decreases by 300 and at the same time, the government cuts taxes by the same amount of 300?
