ECMA06_Tutorial_5_Solution.doc

3 Pages
38 Views
Unlock Document

Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au
Semester
Summer

Description
ECMA06 Tutorial #5 Answer Key If r is held fixed at 0.06 & E is held fixed at 0.85 US$ per C$, then I = 40 – 4.5(0.06 – 0.06) = 40 X = 180 – 2(0.85 – 0.85) = 180 IM = (1/4)Y + 2(0.85 – 0.85) = (1/4)Y Part (a) • Disposable income, DI: DI = Y – T + TR DI = Y – (5/11)Y + [120 – (1/11)Y] = 120 + (5/11)Y • C = C(Y): C = 10 + (11/12)[120 + (5/11)Y] C = 120 + (5/12)Y • The AE function: AE = C + I + G + X – IM AE = [120 + (5/12)Y] + 40 + 320 + 180 – (1/4)Y AE = 660 + (1/6)Y • Equilibrium output: In equilibrium, Y = AE: Y = 660 + (1/6)Y Y* = 792 • Government (budget) deficit: GBB = T – TR – G GBB = (5/11)Y – [120 – (1/11)Y] – 320 = (6/11)Y – 440 GBB = (6/11)(792) – 440 = – 8 ⇒ The government runs a budget deficit of 8. Part (b) Suppose government spending increases by 55, i.e., G = 375: • The new AE function: AE = [120 + (5/12)Y] + 40 + 375 + 180 – (1/4)Y AE = 715 + (1/6)Y • New equilibrium output: In equilibrium, Y = AE: Y = 715 + (1/6)Y Y* = 858 • Government (budget) deficit: GBB = (5/11)Y – [120 – (1/11)Y] – 375 GBB = – 27 ⇒ The government budget deficit increases by 19 to 27. • The (government expenditure) multiplier: dY * ΔY * 858 - 792 dG = ΔG = 55 = 1.2 ECMA06 Tutorial #5 Answer Key 1 Part (c) • In part (b), we showed that an increase in G by 55 will increase (autonomous) AE by 55. • In order for a tax cut to have the same effect on Y*, we need a tax cut such that (autonomous) AE will increase by 55 as well. • Given a tax cut enters the AE function indirectly (through a change in DI and then the consumption), and the marginal propensity to consume out of DI is 11/12, this implies the amount of tax cut, α, is: (11/12)α = 55 α = 60 • A tax cut of 60 would achieve the same result on Y* as shown in part (b). • Note: You can check the result by finding the new AE function after a tax cut of 60 and then find the new Y*. Part (d) Suppose exports fall by 55, i.e., X = 125: • The new AE function: AE = [120 + (5/12)Y] + 40 + 320 + 125 – (1/4)Y AE = 605 + (1/6)Y • New equilibrium output: In equilibrium, Y = AE: Y = 605 + (1/6)Y Y* = 726 • Government (budget) deficit: GBB = (5/11)Y – [120 – (1/11)Y] – 320 GBB = – 44 ⇒ The government budget deficit
More Less

Related notes for MGEA06H3

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit