Question

The government does not like the change in GDP induced by the fall in private invest- ment. It wants to bring it back to the level found in Question (5). For that purpose, it has the options to change its spending or to change taxes. (a) If the government changes its spending alone, find the level of AG required to coun- teract the effect on GDP of the fall in investment. Explain what happened. (4 points) (b) If the government changes instead the level of its autonomous spending alone, find the level of Ato required to counteract the effect on GDP of the fall in investment. Explain what happened. (4 points) (c) How does AG compare to Ato? Explain the difference, if there is any. (2 points) d) In which direction should the government change its marginal tax rate, t1 (increase or decrease), if it uses it as the sole policy instrument to counteract the effect of the fall in investment? Explain intuitively your answer. (3 points)

Answer 1

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a) OY 1-G, Ci-tu of the To Counteract the efect от СлъP Fall in investment 108.69 108.69 - 1-0.611-0.4 108.69 0.46 2.1739 AG - 108.69 108.69 2.1739 DG = 49.9977 o as of 50' is fequired to countevalt effect the bs DY - sto -C I-cll-tal 108.69 -0.6 sto 0.46 - 1.30 4.3 to 108.62. 108.69 (3043 sto Pto Reduction OK 83.33 of is required CS$canned with CamScanner 83:33 autonomous taxes

Crovernment expenditure mutiplier is /ان Das -all-ti) EI 0:46 2.1739 Autonomous tax multiplier is -G sto 1-G (leto) and -0.6 0:46 1.3043 There is difference in bother moltipliers there fore and oto has a difference to Comteract the Change in GDP. d) for change in GDP 180.69 tmarginal tax rate should be reduced by 180.69 ci-tul 180.69 7-C (I-tu I (-0.6(l-ti 18069. 1 -0.6 +0.6ti 180.69 0.4 +0.6t, 12. 318+ | o 8-14 tu 1 108.414 t = -71:276 t = 0.6574 66% Marginal tax rate should be redired by 66% CS$canned with CamScanner