Question

21. Given: C = 400+.8(Yd), initial equilibrium = $7500, the target full-employment equilibrium = $9000. a. Calculate the spending multiplier. Calculate the tax multiplier. b. If G increases by $10, calculate the CHANGE in equil. Y. c. If T increases by $10, calculate the CHANGE in equil. Y. this question is continued

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Answer 1

Ans Given the lonsemption fanchon *Eyt0 The initiol egiubriam h$7500, 4s meavs 005Lh p t.z fuwemplymert euwibaim ()#90e (o) To aulate the Apan din o Erpendteae mutipliee,foumula s 1 when bMPe 0.8 AGY 1-6 5 0. 17 1-0 8 Henue he Apendihy multipen i5 Th ualulale -he tax mulipaer the focmula b 1-6 AT -0.8 -4 A0 AY AT Hense Tax multiplien is 4 1-0.Y

b G ncneese hy t10 then the ehenge in euibriam y ih 14 AY 07 (AG-10 5X10 12 UH o fhe euonium y eiu bfinitial Y+Ay 75 0o+450 -47550 (e) i 410 then the change in T incuease -b AT 1-l0 AY= Thus the eauiubaium Yuiu b Tinitial t AY 7500 +-40) 75 U0-40 7460 1 1

iTinceaased by 10 and & fncreored Simulteninesy,thon y uolu be changed y Ay as T incneages AT 1-6 4x00 40 1A A UT 1-6 AY as b in creases 11 So Net change en 50-40 0 Thus due to a10 inceose in both Tand stthene uiu be a 10 addition to the ) initial -475 004fto $7.510 10
e) To reach the target Y, the change in G should be

∆Y/∆G = 5

∆G = ∆Y/5

∆G = Yf-Y/5

Where Yf - $9000 and Y - $7500

∆G = 9000-7500/5

= 1500/5

= 300

Thus government need to increase $300 to achieve the target GDP

f) To reach the target Yf, there is need to decrease the tax by the amount

∆T = ∆Y/-4

= Yf -Y/-4

= 9000-7500/-4

= -1500/4

= -375

Thus to reach the target amount of Yf=$9000 from the initial Y = $7500 , there is a need to decrease the tax amount by $375.