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17 views13 pages

123

Uploaded by

Majdi Laded
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© © All Rights Reserved
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1- You are given the following

income-expenditures model for the


economy of
Jordan.
C = 200 + .8Yd
T = 50
G = 100
I = 140

(a) What is the equilibrium level of


income in Jordan?

(b) At the equilibrium level of income,


what is the amount of consumption?
(c) What is the value of the
government
spending multiplier in this economy?
(d) If government spending increases
to 150, what is the new level of
equilibrium
income?

A- Y=C+I+G
c=200+0.8(y-t)
y=200+0.8y-40+140+100
0.2y=400
0.2y/0.2=400/0.2
y=2000

b- c=200+0.8(2000)
c=1800

c- 1/1-0.8
=0.2
1/0.2= 5
d- c=200+0.8y-40+140+500
y=800+0.8y
0.2y=800
0.2y/0.2=800/0.2
y=4000

2- Assume the following for the


economy of a country:
C = 100 + .75Yd
T = -200+1/3Y
G = 100
I = 100
A. Calculate the equilibrium level of
output. (
B. Now suppose planned investment
rises by 100. Calculate the new
equilibrium
level of income. Given your answer,
what is the size of the multiplier?
1100
C. What is the size of the tax
multiplier for this
economy?

A. To find the equilibrium level of


output, we need to set Yd
(disposable income) equal to Y
(output). Since Yd = Y, we can rewrite
the equations given as follows:

C = 100 + 0.75Y
T = -200 + 1/3Y
G = 100

Substitute Y for Yd in the


consumption function:
100 + 0.75Y = Y
0.25Y = 100
Y = 400

Therefore, the equilibrium level of


output is 400.

B. If planned investment rises by 100,


this will shift up the aggregate
demand curve. The new equilibrium
level of income can be calculated by:
Y = C + I + G + NX
Y = (100 + 0.75Y) + 100 + 100
Y = 400 + 100 + 100
Y = 600

So, the new equilibrium level of


income is 600. The multiplier is 1/(1-
0.75) = 4.

C. The tax multiplier in this economy


can be calculated as -MPC/MPS. The
marginal propensity to consume
(MPC) is 0.75 and the marginal
propensity to save (MPS) is 0.25
since consumers save 25% of their
disposable income. Therefore, the tax
multiplier is:
Tax Multiplier = -0.75/0.25 = -3

The size of the tax multiplier for this


economy is -3.
3- Assume that taxes depend on
income. The MPC is 0.8 and t is 0.4.
If
government purchases increase by
$100 billion, the equilibrium level of
output
will increase by
M = 1 / (1 - 0.8*(1 - 0.4)) M = 1 / (1 -
0.8*0.6) M = 1 / (1 - 0.48) M = 1 /
0.52 M ≈ 1.923
1.923×1000b
1923B

4- Determine the impact of an


increase in government spending of
$5 billion
when the MPC is .8. Determine the
impact of a decrease in government
spending of $2.5 billion when the
MPS is 1/3.

1/1-0.8 =1/2 =5
5B×5=25 increase by 25 B

-1/3/1-1/3=-1/2
2.5 b × -0.5 = -1.25b

5- Determine the net impact upon the


nation's economy that results from
equal
increases in spending and taxes of
$10 billion when the MPC is 0.8.‫؟‬
1/1-0.8=1/0.2=5
10 b ×5 = 50b

6- Assume the economy was


originally at an output level of $800
billion. The
government then cut taxes by $20
billion. If the economy expands by
$60
billion, what is the value of the tax
multiplier?

T=−3

7- Calculate how much output would


expand by if the government
increased
spending by $500 billion and
financed this spending by increasing
lump-sum
taxes by the same amount.
the change in output would be zero.

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