An economy is described by the following equations 1,500+0.5(Y-T) 1000 1,600 200

Question

An economy is described by the following equations 1,500+0.5(Y-T) 1000 1,600 200 1,600 9,100 NX Y. The multiplier for this economy is 2 Find the effect on short-run equilibrium output of a An Increase in government purchases by 100 from 1,600 to 1700 Instruction: Enter your response as an integer value Short-run equilibrium output will (Click to select)" b. A decrease in tax collections from 1,600 to 1,500 (eaving govermment purchases at their original value of 1,600) Instruction: Enter your response as an integer value Short-run equillbrium output will (Click to select) c. A decrease in planned investment spending by 100 from 1,000 to 90(leaving government purchases and taxes unchanged at their original values on Instruction: Enter your response as an integer value Short-run equilibrium output will Lackto select), to

Explanation / Answer

(Question 1)

In equilibrium, Y = C + Ip + G + NX

Y = 1,500 + 0.5(Y - 1,600) + 1,000 + 1,600 + 200

Y = 4,300 + 0.5Y - 800

0.5Y = 3,500

Y = 7,000

(a) Spending multiplier = 2

It means, when government purchases increase by 1 unit, output increases by 2 units. Therefore,

When government purchases increase by 100 units, output increases by (100 x 2) = 200 units.

Short run output will Increase to 7,200 (= 7,000 + 200).

(b) MPC = 0.50 (From consumption function)

Tax multiplier = - MPC / (1 - MPC) = - 0.5 / (1 - 0.5) = - 0.5 / 0.5 = -1

It means, tax decreases by 1 unit, output increases by 1 units. Therefore,

When tax decreases by 100 units (= 1,600 - 1,500), output increases by (100 x 1) = 100 units.

Short run output will Increase to 7,100 (= 7,000 + 100).

(c) Spending multiplier = 2

It means, when investment spending decreases by 1 unit, output decreases by 2 units. Therefore,

When investment spending decreases by 100 units, output decreases by (100 x 2) = 200 units.

Short run output will Decrease to 6,800 (= 7,000 - 200).

NOTE: First question is answered.

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