ECON 438 Lecture Notes - Lecture 5: Tohorot, Fiscal Multiplier, Output Gap

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16 Jul 2020

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Explain the concepts of marginal propensity to consume (mpc) and marginal propensity to save (mps). (2pts) The mpc is the fraction of any additional income that is consumed (spent on consumption) while the mps the fraction of any additional income that is saved: what is the mpc for this economy? (2pts) The mpc for this economy is 0. 4: explain the concepts of the autonomous spending and tax multipliers. (2pts) The autonomous tax multiplier is a multiple by which equilibrium income changes when any component of autonomous spending changes. The autonomous tax multiplier is the multiple by which equilibrium income changes when there is a change in autonomous tax: what is the autonomous spending multiplier for this economy? (2pts) The autonomous spending multiplier for this economy is: 1/1 mpc = 1/1 0. 4 = 1. 67: what is the equilibrium level of income for this economy? (3pts) =1108. 33: suppose that the full employment level of output for this economy is 4000.

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Assume the following values of an economy.

Planned Investment (Ip) = $20

Autonomous Consumption (C ) = $30

Marginal Propensity to consume (MPC) = .9

a. What is the equilibrium income?

b. What is the value of saving at equilibrium?

c. Does the saving and Investment Identity hold true at equilibrium income OR GDP?

2. In addition to the values given in question (1) above, assume the government increases its spending by $30 without raising taxes. The government can do this by borrowing from the private sector.

a. Based on this information calculate the new level of equilibrium income.

b. Calculate the total value of consumption at equilibrium.

c. Calculate the total value of saving at equilibrium.

3. In addition to questions in (1 & 2) above, assume the government decides to raise autonomous taxes by $30 to balance its budget.

a. What is the new value of equilibrium income?

b. What is the value of the autonomous tax multiplier?

c. What is the value of autonomous spending multiplier?

4. In addition to the value in questions (1, 2 & 3), assume the following values.

Autonomous export (Xa) = $30

Autonomous import (Ma) = $10

Marginal propensity to import = 0.1

a. What is the new value of equilibrium income?

b. What is the value of total consumption of domestically produced good at equilibrium?

c. What is the value of the trade surplus or deficit at equilibrium?

d. What is the value of the marginal propensity to consume domestically produced goods?

e. What is the value of capital inflow or outflow

azuremosquito975

Assume the following values of an economy.

Planned Investment (Ip) = $20

Autonomous Consumption (C ) = $30

Marginal Propensity to consume (MPC) = .9

What is the equilibrium income?

Y* = aggregate demand at the equilibrium level. (Consumption + investment)

Consumption function = autonomous consumption + mpc * Y.

C=30 + .9Y

AD = 30 + .9Y + 20 = 50 + .9Y

Y= 50 + .9Y.1Y = 50

Y = $500 is the equilibrium level of income.

What is the value of saving at equilibrium?

Savings = income - consumption at the equilibrium level of Y=500,

Consumption = 30 +.9 * 500 = $480

Savings = 500 - 480= 20

c. Does the saving and Investment Identity hold true at equilibrium income OR GDP?

Since planned investment = $20 which is equal to savings calculated, the saving investment identity holds true at equilibrium income.

2. In addition to the values given in question (1) above, assume the government increases its spending by $30 without raising taxes. The government can do this by borrowing from the private sector.

a. Based on this information calculate the new level of equilibrium income.

If Government expenditures = $30, Y = C + I + G

Y = 1/1-.09 * (30+20+30) Y = 800

b. Calculate the total value of consumption at equilibrium.

C = 30 + .9(800) = 750

c. Calculate the total value of saving at equilibrium.

Savings = I - C = 800 - 750 = 50

3. In addition to questions in (1 & 2) above, assume the government decides to raise autonomous taxes by $30 to balance its budget.

What is the new value of equilibrium income?

Y = 1/1-.9 (30-.9(30) +20+30) = 530

What is the value of the autonomous tax multiplier?

-.09/.01 = -9

c. What is the value of autonomous spending multiplier?

1/.1 = 10

ochrewildebeest111

5. Suppose that there is no private investment, no government sector, no international trade in an economy. The aggregate demand is equal to total consumption demand. If the autonomous part of consumption (is 30 and the marginal propensity to consume (is 0.8, what is the multiplier? Explain the derivation procedure and the final equilibrium output equation showing the multiplier.

6. Suppose that there is no government sector and no international trade in the economy. If the autonomous part of consumption (is 30, the marginal propensity to consume (is 0.8, and the given private investment is 60, what is the multiplier? Show the derivation procedure and the final equilibrium output equation with multiplier.

7. Suppose that the government imposes a lump sum tax, T, on the income. If the consumption demand is described by where and the private investment is given as , what is the multiplier. Derive the equilibrium output equation that shows the multiplier.

For questions from 8 to 12, suppose that the economy (that is not engaged in international trades) is characterized by the following behavioral equations:

ECON 438 Lecture Notes - Lecture 5: Tohorot, Fiscal Multiplier, Output Gap

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