Question

Consider National-Income Model: National Income: Consumption: Investment: Government Sector: Taxes: Y=C+I+G C = a + b (Y-T) I=k+rY G=Go T=f+jY 0<b<1 0<x<1 a> 0 in mln dollars; k>0 in mln dollars; Go > in mln dollars f> 0 in mln dollars; 0<j<1 1) Discuss in words the meaning of each of the equations in the model (3 points); 2) Find the equilibrium level of GDP (Y) in reduced form (3 points); 3) If we know the parameters of the system, find the numerical value of the equilibrium GDP (Y) as well as the equilibrium levels of C, I, and T (3 points); Parameters' values are as follows: a = 10; b=0.7; f= 3; j = 0.2; k= 25; r = 0.03. Endogenous Government Expenditure is Go = 55. 4) Find the government-expenditure multiplier and discuss its economic meaning (3 points); 5) Find the non-income tax multiplier and discuss its economic meaning (3 points); 6) Find the extent to which an increase in the income tax rate () will affect the equilibrium income Y (3 points). 2. Points = 26. Consider Market Model: Demand: Supply: Q = a -6P Q=-c + DP (a, b>0) (c,d > 0) 1) Discuss in words the meaning of each equation in the model (3 points); 2) Find the equilibrium levels of P and Q (3 points); 3) Draw qualitative conclusions about changes in P and Q when each of the parameters change. (Qualitative conclusion shows the direction of change.) Explain economic meaning of these changes. its: 3 points for P; 3 points for O): 4) If a= 10, c = 5, b = 2; d = 3, draw quantitative conclusions about changes in P and Q' when each of the parameters change. (Quantitative conclusion shows the magnitude of change. Explain economic meaning of these changes. (Total 6 points: 3 points for P ;3 points for Q ); 5) Show your conclusions in (4) graphically. Note: Carefully label everything on your graphs. Make the graphs neat and understandable. Points will be deducted for missing labeling and for hard-to- understand graphs. (Total 8 points: 4 graphs -- change in a; change in b; change in c, change in d; -- 2 pts each).

please, i need answeer for all 4 questions

Answer 1

AD. In the first equation we have t o watimal Inconie Ya et It G D This equation conneys the fact that National Income INI) consists of three main components, (assuming a closed economy, le.. conumption (c), investment 1I) and Government Purchases (G) In the second equation in Consumption & laat bly-7) ayo in rili &; 0<b<l, This equation expresses that consumption has too. components, i e,, an autonomous consumption part," which does not depend on income) 'a' and another. inome dependent part, ize, 46,44-1)). (y-7) is the disposable income , where, Y,is, the National Income (or GDP), and I, is the total tax paid bo is the inarginal propensity to consome, ire, Mre, out of dispor disposable income t o <b<l, tingly tells us that as disposable income changes by 1 vnit,.consumption thanges by a fraction bunit.!

In the third equation d es - Innestment: I = k try .,kyo win nilasi orci In this expression, Innestment, to the consuniption has two parts. One is the autonomous na innestment part, (which does not depend on inome) k and another inome dependent part & nye lp is the marginal propensity to invest and it is the change in investment, when. Income changes by 1 unit change in Investment is less than the change in income, because o<ral. In the fourth equation: . Government furthe sectora G = Goi Go) O in miln & Expenditures of Giovernment sector is aut coripletely autonomous and here independent of the income. level, y: Generally, we assume G to be ainsi exogeneous variable dire, a variabile determined.. outside the system).. In the fifth equation Taxes: A TA+gy to in th & : 0221. bis In this equation Taxens esmprises of two parts: One is the inconie independent part of which is sometimes called the Lumpsum Tax, and an income dependent art, which is known as imone-taxi

I here "il is the income tax rate, ice, it Y changes w unit, income tax collected for deposited) would change by 'j) unita putting all the values of e, I, do G and I in the quation for National Income, we have Y = l + I + G . >> Y= a + b24- (+jY) 4:+k+ rY+G0. =) Y =.a + by – bf – bjY+ki+ry + Go . -) Y-64 + b} Y-ry's la -67 + Go +k. 58411-64b; -r) - A-bf+k+GO. - ... (a - b + b + c ) -+ . [1-6 (1-3)=r7 yok in the above. equation gives us the equilibrium lend of GDP (4*) in redvied form a re

3) We have a di10; b: 0977:3; ;:0.2; k = 25; G0=55; 8-0.03 : Thew, we have ? ! your la- bf +k+G.) S: 10 = (07x3) + 25 +55 [1- 6:7 (1-0-2) – 0:05] 87.9 - 214:39.. ' 0:41. is Equilibrium GDP; Y# 214-39 (in mila $). Now, T = f+jų. 5) T = 3 + 0.12.(-214839) -) T = 45.878. (In mula $).' Heme, we have i : . <= a + b (4-T) = 10 + 0.7 (214-39 - 45.899 = 127.958 in Equilibrium Consumption i C = 127.958 (in memes)

I= kt ry - I - 25+(0.03 X214:39). 3) I = 31.4 32. is Equilibrium Investment : I = 31-432 (in mlu f). 4 Government Expenditure Multiplier is given by : dy - 1 NG 1-6 where, dy change in income dG i change in Government expenditure. bampe .. Therefore, Government Expenditure multiplier is 3.333. This multiplier is the change in income, when government expenditure increases bag (or Wecreases) by 1 unit Increase in G increases Y, which in turn increases consumption. This, a fraction of the increase in Y is unsumed. After several linfinite) round of this increments lead us to the multiplier being (16) iets 03 = 3. 333