ECO209Y1 Chapter Notes - Chapter 4: Full Employment, Excess Supply, Business Cycle

68 views2 pages

lilacoyster158

26 Oct 2017

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Chapter 4: adding government and external sector to. Transfer payments do not contribute to gdp or national income. Now, ae = c + i + g. Mpcyd = c(1-t) zy is induced aggregate expenditure. In this model, z = c(1-t) z is marginal propensity to spend. Rate of change in equilibrium income given change in autonomous aggregate expenditure. Full employment/potential output: maximum level of output an economy can product with existing productive resources (labor force, physical capital, state of technology) without generating inflationary pressures. Economic and social cost of underutilized resources and people not being able to find employment. Foregoing opportunity to produce more with resources available. Well-being of those unemployed and of society worse off. Economy can be at equilibrium below full employment. Excess supply will arise from time to time no matter what. Economy moves from expansion to contraction over business cycle. Business cycle is not malfunction of system but inherent part of capitalism.

Related Questions

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

Given the following information for the Macro Economy answer the following questions.

In this economy we have an MPC equal to 0.80, Autonomous Consumption of $600 billion, Planned Investment (I) of $1,000 billion, Government Spending (G) of $1,200 billion and Net Taxes (T) of $1,000 billion.

a) Fill in the missing data for: T, Yd, C, S, and AE (in that order in a table) for every level of Y given below (all the numbers are in billions).

Income (Y) Net Taxes (T) Disposable Income (Yd) Consumption (C) Savings (S) Aggregate Expenditures (AE)
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000

b) Determine the Equilibrium level of Aggregate Income (Ye). Please state the reason for your answer.

c) Calculate the Spending Multiplier (show how you got your answer).

d) State in one sentence what your answer in (c) above tells us about any decrease in spending that takes place in the economy.

e) If this economy had a full employment level of income equal to $8,000 billion, what Macroeconomic condition is this economy experiencing.

f) Using the Spending Multiplier, determine the change in G that is needed to get this economy to be in equilibrium at full employment. Please show your work.

g) Using the Spending Multiplier, determine the change in T that is needed to get this economy to be in equilibrium at full employment. Please show your work.

cerisesnake32

On the planet Omicron Persei 8, government spending is $1000, net taxes are $1200, and planned investment is $1400. Consumers spend according to the equation C = 100 + 0.8Yd, where Yd represents disposable income. Given this information, fill out the table below to determine which of the output levels represents a macroeconomic equilibrium, then answer the questions that follow. Output (Income) Y Net Taxes T Disposable Income Yd Consumption C Planned Investment I Government Purchases G Planned Aggregate Expenditure AE Unplanned Inventory Change 6200 1200 5000 3850 1400 1000 6250 -50 6700 1200 5500 4225 1400 1000 6625 75 7200 1200 6000 4600 1400 1000 7000 200 7700 1200 6500 4975 1400 1000 7375 325 8200 1200 7000 5350 1400 1000 7750 450

An a. Which level of output is a macroeconomic equilibrium? There is no level of equilibrium based on inventory levels.

b. Is the government budget balanced, in deficit, or surplus, and by how much? Since the government is spending less than it is collecting in taxes, we are showing a surplus.

c. Find the marginal propensity to consume, and the marginal propensity to save. d. Find the government spending multiplier. If the government wanted to increase the equilibrium level of income by $1,000, how much would it have to increase government purchases? e. Find the tax multiplier. If net taxes were lowered by $100, what effect would it have on the equilibrium level of income? Give a specific numerical answer.

cerisewallaby167

ECO209Y1 Chapter Notes - Chapter 4: Full Employment, Excess Supply, Business Cycle

Document Summary

Get access

Related textbook solutions

Principles of Economics

Principles of Macroeconomics

Principles of Microeconomics

Related Documents

ECO209Y1 Lecture Notes - Lecture 9: Exchange Rate, Capital Outflow, Fiscal Policy

ECO209Y1 Lecture Notes - Lecture 6: Fiscal Policy, Parsec, Equilibrium Level

ECO209Y1 Chapter Notes - Chapter 3: Disposable And Discretionary Income, Shortage, Consumption Function

Related Questions