ECON1132 Lecture Notes - Lecture 6: Fiscal Policy, Keynesian Cross, Equilibrium Point

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apricotspider924

25 Mar 2015

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Econ1132: principles of macroeconomics- lecture 6: fiscal policy in the keynesian. Is determined by total spending, subject to an upper limit of q* Shows equilibrium as an intersection of c+i with q. If i rises, the new i spending creates new output, which adds jobs and raises disposable income. This increases consumption spending on a second round, which further raises output and c spending. Including government spending and taxes into the model: Assume no depreciation, no corporate retained earnings, no imports or exports. Di=q-t (t flows to government and the remainder goes to households as di) At equilibrium point, spending just equals output. Below equilibrium, spending exceeds output, firms respond to orders and thus increase output. Above equilibrium, spending is less than output, unsold goods pile up, firms cut back output. Don"t assume in general that the multiplier is equal to 1/(1-mpc) in this case. Tax multiplier: change in output/change in taxes mpc/(1-mpc)

Related Questions

Assume that the equations below describe the expenditures within a particular macroeconomy and that these equations conform to the assumptions we've made in the lecture regarding the fixed price level Aggregate Expenditure model. All values for expenditure and income are dollar amounts, but for simplicity, we've dropped the $ below.

C = 0.8(DI) + 1000	C = Consumption expenditure, DI = Disposable Income
I = 2000	I = Investment expenditure
G = 1000	G = government expenditure
X = 1600	X = spending on exports
M = 1800	M = spending on imports
DI = Y - T	Y = real GDP, T = tax revenues/>
T = 1000
Yp = 12000	Yp = Potential GDP

Given the equations above, we can describe the GDP, government budget, and net exports in this economy. Select three characteristics from the list below which accurately describe this economy. Note that there is no partial credit on this question. I.e., your answer will either be all correct, or all wrong.

	a.	inflationary gap
	b.	recessionary gap
	c.	no output gap
	d.	government budget surplus
	e.	government budget deficit
	f.	balanced government budget
	g.	trade deficit
	h.	trade surplus
	i.	net exports of zero

pucearmadillo585

1.In the Keynesian model, suppose that the economy has the following values :

C = 100 + 0.75*(Y-T) G = 300 I = 200 NX = 0 T = 200

1a. Suppose that households become nervous about the future of the economy and decide that they will consume less and save more money, so their new consumption function becomes C = 0.75*(Y-T). Solve for the new equilibrium level of output and calculate how much households end up saving.

1b. Ignoring the change in consumption from part d, how much would output increase if government spending increased by 100?

1c. Ignoring the change in consumption from part d, how much would output increase if taxes were cut by 100?

harlequinmallard904

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

ECON1132 Lecture Notes - Lecture 6: Fiscal Policy, Keynesian Cross, Equilibrium Point

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