EC140 Lecture Notes - Lecture 5: Nominal Interest Rate, Output Gap, Business Cycle

12 views17 pages

periwinkledinosaur291

9 Mar 2016

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

meghan78 and 39778 others unlocked

EC140 Full Course Notes

Verified Note

21 documents

Document Summary

Understand how government purchases and tax revenues relate to naional income. Understand how exports and imports relate to naional income. Disinguish between the marginal propensity to consume and the marginal propensity to spend (next class) understand how government and taxes afect the simple muliplier, and how government policy can inluence naional income. Governments have two funcions in the model. Budget deicits and surpluses: if t g > 0, we have a surplus, if t g < 0, we have a deicit. Levels of government: federal structure in canada implies muliple levels of government, model assumes all levels of government included in t and g. Consumpion funcion as deined before: c = a + b * yd. Subsitute into the consumpion funcion: c = a + b(1-t)y. If ae > y, inventories would be falling, irms would increase output, and therefore income would rise.

Related Questions

On the planet Omicron Persei 8, government spending is $1000, net taxes are $1200, and planned investment is $1400. Consumers spend according to the equation C = 100 + 0.8Yd, where Yd represents disposable income. Given this information, fill out the table below to determine which of the output levels represents a macroeconomic equilibrium, then answer the questions that follow. Output (Income) Y Net Taxes T Disposable Income Yd Consumption C Planned Investment I Government Purchases G Planned Aggregate Expenditure AE Unplanned Inventory Change 6200 1200 5000 3850 1400 1000 6250 -50 6700 1200 5500 4225 1400 1000 6625 75 7200 1200 6000 4600 1400 1000 7000 200 7700 1200 6500 4975 1400 1000 7375 325 8200 1200 7000 5350 1400 1000 7750 450

An a. Which level of output is a macroeconomic equilibrium? There is no level of equilibrium based on inventory levels.

b. Is the government budget balanced, in deficit, or surplus, and by how much? Since the government is spending less than it is collecting in taxes, we are showing a surplus.

c. Find the marginal propensity to consume, and the marginal propensity to save. d. Find the government spending multiplier. If the government wanted to increase the equilibrium level of income by $1,000, how much would it have to increase government purchases? e. Find the tax multiplier. If net taxes were lowered by $100, what effect would it have on the equilibrium level of income? Give a specific numerical answer.

cerisewallaby167

The Modified Keynesian Model

Y = C + I + G + X â IM â¦ equilibrium condition in a 4-sector model where:

C = 150 + 0.9DI â¦ consumption function

I = 50 â¦ autonomous investment

G = 100 â¦ autonomous government spending

X = 200 â¦ autonomous exports

IM = 100 â¦ autonomous imports

And also:

DI = Y â T + Tr T = 0 â¦ autonomous taxes

Tr = 0 â¦ autonomous transfer payments

YF = 5000 â¦ full-employment Y

1. Solve for the equilibrium level of real output/income (Y*) in this economy.

2. Given the model above, net exports equal $________. Does this represent a trade deficit or trade surplus?

3. Given the model above, the federal budget has a (deficit/surplus) equal to $________.

4. What is the value of the MPC? â¦ the value of the MPS?

5. Calculate the âoversimplifiedâ expenditure multiplier.

6. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap?

7. (Refer to question â6â.) How much is the gap equal to?

8. Suppose the government chooses to eliminate the gap by using expansionary fiscal policy (i.e., increasing G). Given the numbers above, by how much would government spending (G) need to increase to achieve the goal of full-employment?

9. Suppose instead that the government decided to lower taxes to eliminate the output gap in question â6â. How much would taxes need to fall to achieve the goal of full-employment?

10. Which action (raising G or lowering T) has the largest effect on the federal budget deficit and the national debt?

11. Suppose the national debt equaled $6000 before the tax cut (refer to question â9â). What would be the value of the national debt after this policy action?

azurellama883

Consider an economy in which taxes, planned investment, government spending on goods and services, and net exports are autonomous, but consumption and planned investment change as the interest rate changes. You are given the following information concerning autonomous consumption, the marginal propensity to consume, planned investment, government purchases of goods and services, and net exports:

Ca = 1,500 - 10r c = 0.6 Ip = 2,400 - 50r G = 2,000 T = 1,800 NX = -200

a. Compute the value of the marginal propensity to save.

b. Compute the amount of autonomous planned spending, Ap, given that the interest rate equals 5.

c. Compute the equilibrium level of income, given that the interest rate equals 5.

d. Suppose that autonomous consumption changes by 4 percent of any change in household wealth and that the decline in the housing market in 2006-07 and drop in the stock market in the summer of 2007 reduces household wealth by $750 billion. Compute the decrease in autonomous consumption that results from the decline in household wealth.

e. Calculate the new amount of autonomous planned spending, Ap, and the new equilibrium level of income, given that the interest rate equals 5.

f. Using your answers to parts c-e, compute the value of the multiplier.

yellowzebra40

EC140 Lecture Notes - Lecture 5: Nominal Interest Rate, Output Gap, Business Cycle

EC140 Full Course Notes

Document Summary

Get access

Related Documents

EC140 Lecture Notes - Lecture 4: Consumption Function

EC140 Lecture Notes - Lecture 20: Unemployment, Business Cycle, Government Spending

EC140 Lecture Notes - Lecture 6: International Trade, Consumption Function, Expenditure Function

Related Questions