ECON 0110 Lecture Notes - Lecture 16: Fiscal Multiplier, Parsec

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brownduck476

13 Feb 2015

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How do income taxes influence the magnitude of the. The successive increases in output and consumption spending will be. Now consider the same economy with an income tax of, say, 20%. The successive increases in output will be as follows: Because there is a 20% tax, in round 2, the worker who earned only has of disposable income. Given an mpc of . 75, the worker spends 75% of the . This yields new spending, and new output of . x (1 - . 20) x . 75 = x . 60 = . x (1 - . 20) x . 75 x (1 - . 20) x . 75. The sum = x [1/1-. 60)] = x [1/(1 - . 75{1 - . 20})] $ 31. 64 mpc = . 75; tax rate = . 20. x [1/(1 . 75 x {1 - . 20}] An increase in mpc causes the multiplier to increase. An increase in t causes the multiplier to decrease.

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Economics

Unit 9: Keynesian Economics - Multipliers

Name _______________________________________________________

Answer the following problems. Show ALL work for every problem.

Keep in mind the equations you learned:

Change in G x SM = Change in AE

Also recall that if you know how much AE must change by AND you know the SM, you can solve for how much G must change by.

1. MPC = .9 AE must increase by $350 billion to reach the full employment level of RGDP. Solve for the change in Government spending required to accomplish this. 2. MPC = .9 AE must decrease by $250 billion to eliminate an inflationary gap. Solve for the change in Government spending required to accomplish this. 3. MPS = .15 AE must increase by $700 million to eliminate a recessionary gap. Solve for the change in Government spending required to accomplish this. 4. MPC = .8 Government spending increases by $500 million. How much does AE increase by? 5. A recessionary gap of $18 billion exists. The SM = 4. How much must Government Spending increase by? 6. An inflationary gap exists of $20 billion. The SM = 4. How much must Government Spending DECREASE by? 7. The MPC is .75. AE must increase by $100 million. How much must Government Spending increase by?

Instead of increasing Government Spending, Congress has chosen to decrease tax rates. Use the tax multiplier (TM) to solve the following.

Change in Taxes x TM = Change in AE

8. The MPC is .75. AE must increase by $100 million. How much should the tax decrease be?

9. The MPS is .1. AE must decrease by $80 million to reduce inflation. How much should the tax INCREASE be?

10. Suppose the government wishes to eliminate an inflationary gap of $100 billion and the MPC is .60. How much must the government increase taxes by?

tanwater-buffalo567

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

1. Suppose the multiplier in a given economy is 2.5. If government spending increases by 10, how much will GDP increase by?

10 * 2.5 = 25

2. Again, suppose the multiplier is 2.5. If investment spending falls by 4, what will be the change in GDP?

- Invetment spending falls by 4 --> - 4

2.5 * - 4 = - 10

3. Again, suppose that the multiplier for a given economy is 2.5. The authorities believe that GDP is currently below potential, and would like it to increase by 5. How much should they raise government spending to bring this about?

2. 5 * ___ = 5 ---> 5/2 = 2

Government spending should raise to 2

4. Suppose the marginal propensity to consume in an economy is equal to 0.75. What is the marginal propensity to save?

mpc = 0.75

marginal propensity to save = 1 - 0.75 = 0.25

5. Again, suppose the marginal propensity to consume is 0.75. If GDP increases by 20, what is the change in consumption?

mpc = 0.75

GDP (Y) = 20

C = 0 + 0.75 * 20 = 15

6. Suppose the marginal propensity to consume in an economy is equal to 0.75. If there were no taxes and no foreign trade, what would the multiplier be?

mpc = 0.75

1 - 0.75 = 0.25

0.25 â> 1/4

1 / 1/4 = 4/1 = 4

multiplier = 4

* I would like to know if my answers are correct and if I used the correct formulas to find the answers. Thank you.

carminepanda548

ECON 0110 Lecture Notes - Lecture 16: Fiscal Multiplier, Parsec

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