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Chapter 8 Practise with Answers

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ECON 2450
Frank Marchese

Answers to Practice Exercises on Chapter 8 Analytical Exercise 2 from Textbook p267a Because it does not affect the marginal propensity to expend it does not affect the slope of the planned expenditure line It does however raise the level of the planned expenditure line by 10 billion at every pointb It increases the constant term of the planned expenditure function by 10 billionc It will raise them by an amount equal to 101MPE billion where MPE is the marginal propensity to expend Analytical Exercise 4 from Textbook p268a It is the product of the netoftax rateone minus the tax rateand the marginal propensity to consume So the MPE07875b The value of the multiplier is 11MPE471c Since YA1MPE a level of autonomous spending A equal to 2125 billion would be required in order to achieve an equilibrium level of aggregate demand of 1 trillionPolicy Exercise 1 from Textbook p268a Tax collections fall to 30 of 950 billion285 billion The government is now running a budget surplus of 85 billion a yearb Tax collections rise to 30 of 12 trillion360 billion The government is now running a budget surplus of 160 billion a yearc The actual budget surplus is shifted around not just by changes in government policy but by other changes in the macroeconomy as well The fullemployment surplus or deficit has the advantage of being affected by changes in policy alone The disadvantage of the fullemployment surplus is of course that it is a theoretical construct and not an actual measurement of any kind A further disadvantage is that in order to calculate it you have to know what potential output and full employment are If you dont or if you are wrong in your estimates you have calculated a quantity that is not what you think it is
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