Question

Suppose in the economy autonomous consumption - $100, autonomous investmen $120, government purchases G-$400 lump-sum taxes = $70, transfers Tr-$20, exports Er $150 autonomous imports im = $30, marginal propensity to consume mpc = 0.8, proportional income tax rate 1-20%, marginal propensity to invest mpi-0.1, and marginal propensity to imports mpm-0.4 (a) For this economy calculate (i) the amount of autonomous spending: (ii) the value of the spending multiplier; (iii) the equilibrium level of output; (iv) the government budget (does government run budget deficit or budget surplus?) (b) Suppose the full-employment level of output equals $1800. Is there a recessionary or an inflationary gap in this economy? What type of fiscal policy is needed in this case? (c) By what amount government must change 0 government spending; or (i) lump-sum taxes; or (ii) transfers to overcome this gap? Give your calculations for each instrument and show the results of the change (compared with the initial situation) on the correctly labeled Keynesian cross graph in the (AE - Y) space and on the AD-AS graph in the (P - Y) space, putting all the figures from your calculations. (Hint: there must be totally 2 graphs and in the AD-AS model graph SRAS curve must have a positive slope.) (d) What will be the change in the government budget in each case? Give your calculations. (Hint: Do not forget about tax revenues from proportional income taxes.) (e) Suppose the full-employment level of output equals $1725. Is there a recessionary or an inflationary gap in this economy? What type of fiscal policy is needed in this case?
B,c,d,e please solve

Answer 1

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