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MGEA06H3 Lecture Notes - Government Budget Balance, Disposable And Discretionary Income, Consumption Function

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bluetiger347
16 Jun 2013
School
UTSC
Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au

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MGEA06H3 Full Course Notes
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MGEA06H3 Full Course Notes
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Document Summary

If r is held fixed at 0. 05 & e is held fixed at 0. 85 us$ per c$, then. I = 50 5(0. 05 0. 05) = 50. X = 220 3(0. 85 0. 85) = 220. Im = (3/11)y + 2. 5(0. 85 0. 85) = (3/11)y. Di = y (44 + 0. 3y) + (110 0. 1y) = 0. 6y + 66: c = c(y): C = 70 + (6/11)y: the ae function: Ae = [70 + (6/11)y] + 50 + 300 + 220 (3/11)y. Ae = 640 + (3/11)y: equilibrium output: Y = 640 + (3/11)y (8/11)y = 640. Suppose government spending increases by 40 to 340, i. e. , g = 340: the new ae function: Ae = [70 + (6/11)y] + 50 + 340 + 220 (3/11)y. 35 ( 20) = 15: when government spending increases by 40, the government budget deficit increases by 18 (gbb falls by 18). In addition, the country"s trade deficit also widens when government spending rises.

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Related Questions

The Modified Keynesian Model

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

C = 150 + 0.9DI … consumption function

I = 50 … autonomous investment

G = 100 … autonomous government spending

X = 200 … autonomous exports

IM = 100 … autonomous imports

And also:

DI = Y – T + Tr T = 0 … autonomous taxes

Tr = 0 … autonomous transfer payments

YF = 5000 … 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? … the value of the MPS?

5. Calculate the “oversimplified” expenditure multiplier.

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

7. (Refer to question “6”.) 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 “6”. 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 “9”). What would be the value of the national debt after this policy action?