Question

USU.US CUJL 1.ULTIUZULUVV.CUIT 1. Points = 18. 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+j Y 0<b<1 0<r<1 a> 0 in mln dollars; k>0 in mln dollars; Go >O 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 (j) will affect the equilibrium income Y (3 points).

1 through 6 is basicly one question which is divided up

Answer 1

National income is deteorminad by expenditou approach. whuu output 'n sum of Consumption, government and investmemt ezpemditwra Consumption eapendiane in epemditwu and that depemds on disposable income Y- T sum of autonomow non autovomowo expenditue Jnvesimunt n positive fmction of reat income dollar imcrease in income amd ever 'mareases invesimamk by r douor. Yr n MPJ Crorexn mant expenditwe n exoqenouoi iren atGo ane part of non income tazf and imcome tar iY, whoru tn rate Taxus mon tax mcome Gr 2 Y C+ k + * \ + Gro a+ b (Y- T) E a b-bf - biY + h + rT+Go a-bf Go a-bf

b o' 7, f- 3, j-6 a ,k-25 a10 Assuming Go-55 bf a- 10- 2'1+ 25 +55 - Y 2 4 39 Govee nmamt expendiiwru multipiex : 4. dr* 2:44 This 'mplies for evej douar rise in Go ises b 2'Ad doClar . mational income tax ( muuutipiex Non income ar* af - b - O 7 dollar rise in f; nation This implies for each '{l dolar. Ra Tha imcome ax rate multiplier: decrease al income 6. - o (1- O68 The mcrease in iu decrease income A (6 pecet .