1. Refer to the figure above. c.p. stands for ceteris paribus, all other things
ID: 1097567 • Letter: 1
Question
1. Refer to the figure above. c.p. stands for ceteris paribus, all other things being equal the only thing that changes is the variable that is explicitly stated. a) Based on the figure, how much is autonomous spending? b) Based on the figure. when PAE = 1000 + .75Y, how much is short-run equilibrium output? C) According to the figure, would the equilibrium output level represent a full- employment equilibrium, recessionary gap or an inflationary gap? d) Based on the figure, the how much is the income-expenditure multiplier (I want an actual number)? e) Based on the figure, the how much is the full-employment output (I want an actual number)? Based on the figure, if output (Y) is 5000, how much would PAE be? a) Based on the figure, if the government acted to move the economy from its equilibrium to full employment Y*, c.p., what type of action would they pursue (expansionary or contractionary)? b) Based on the figure in the spending multiplier, how much would government purchase need to change to achieve a full-employment equilibrium (Y*)? c) Based on the figure, how much would tax change to achieve a full-employment equilibrium (Y*)? d) Why is amount of tax change different from the amount of change in government purchases in achieving Y*?Explanation / Answer
2
a)
since equilibrium output is greater than full employment level output. Contractionary fiscal policy will reduce the aggregate expenditure and will shift the expenditure curve to left which will result in lower equilibrium output.
Contractionary
b)
dY=4000-3000=1000
MPC= .75
Multiplier= 1/(1-MPC)=4
dY/dG=government spending multiplier = 1/(1-MPC)=4
dG=dY/4=250
C)
Lump sum tax multiplier= MPC/(1-MPC) = 3
dY/dT=3
dT=1000/3=333.33
D.)
Lump sum tax decreases the disposable income of people, which has direct impact on consumption. When lump sum tax increases people have less money to consume, as a result the impact of multiplier decreases. So by incorporating tax change government have to impose higher restriction compare to government expenditure.
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