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You are given the following information about the economy: autonomous consumption = $300 billion planned investment = $300 billion government spending = $500 billion mpc = .8 imports = $200 billion exports = $500 billion

a. If full employment Y = $6000 billion, is there a recessionary or inflationary gap?

b. If full employment Y = $6000 billion, what is the GDP gap?

c. What kind of fiscal policy (expansionary or contractionary) could help the economy close the gap?

d. If you decided to change government spending, how much would you change G to close the GDP gap?

e. If the value of the dollar depreciated, how would this affect net exports? AD?

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Nusrat Fatima
Nusrat FatimaLv10
29 Sep 2019

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Related questions

2. You are given the following information about the economy: autonomous consumption = $300 billion planned investment = $300 billion government spending = $500 billion mpc = 2/3 imports = $500 billion exports = $200 billion

a. Using the values above, what is the equation for the consumption function?

b. Using the values above, what is the income/spending multiplier?

c. What is the value of Net Exports?

d. Is there a trade surplus or deficit? Of how much?

e. Using these values, what is the equation of aggregate demand?

f. What is the equilibrium level of Y?

g. If full employment Y = $6000 billion, is there a recessionary or inflationary gap?

h. If full employment Y = $6000 billion, what is the GDP gap?

i. What kind of fiscal policy (expansionary or contractionary) could help the economy close the gap?

j. If you decided to change government spending, how much would you change G to close the GDP gap?

k. If the value of the dollar depreciated, how would this affect net exports? AD?

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?

GDP C Ig G X M
300 250 40 20 30 10
350 290 40 20 30 10
400 330 40 20 30 10
450 370 40 20 30 10
500 410 40 20 30 10
550 450 40 20 30 10
600 490 40 20 30 10
650 530 40 20 30 10

a). Calculate the MPC, MPS, and the multiplier

b). If full employment GDP is 600:

1). Is there an inflationary gap or a recessionary gap?

2).How much would government spending need to change to bring about the necessary change to return the economy to full employment equilibrium?

3).Alternatively, to a change in G, how much would taxes have to change to bring about the necessary change in to return the economy to full employment equilibrium?

c).If full employment GDP is 350:

1).Is there an inflationary gap or recessionary gap?

2).How much would spending need to change to bring about the necessary change to return the economy to full employment equilibrium?

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