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In the simple Keynesian model, taxes do not depend on income (T = Ta). Suppose Ta = 80 and:

C = 250 + 0.75 YD

Ip = 64

G = 100

NX = 20

A. Calculate the equilibrium GDP and show graphically. What is the budget surplus (or deficit)? Hint: BS = T - G

B. Suppose in order to reduce the deficit, government spending is reduced by 20 (from 100 to 80. Calculate the new equilibrium GDP and show graphically (show both the new and old Ep curves). Calculate the government spending multiplier two ways (ΔY/ΔG and with the formula).

C. Suppose instead, we leave G at 100, but raise taxes by 20 (from 80 to 100). Calculate the new equilibrium GDP and show graphically (show both the new and old Ep curves). Calculate the tax multiplier two ways (ΔY/ΔT and with the formula). Why is this different that the government spending multiplier (ΔY/ΔG)? (photo for those questions is below)

In the simple Keynesian model, taxes do not depend on income (T = Ta). Suppose Ta = 80 and: C= 80+0.8 YD Ip = 64 G= 100 NX =

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Answer #1

y = C+I+n+ NX. (+ItinXN = 80 to 8ly-80 +64t 100 + 20 y = 80+0.8y-64 +64 +100+20 Y = 200+ 0-84 99 0.2y = 200 y = 2000 1000 TODy = so to .8 (y-100) +10o +64 +20 Y = 80tory-80 + 100 +64 +20 y = 184 +0.89 0.2y = 184 - 184 = 1920 y = -0.2 4 (+7+47 Na .lt

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