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Question

Sea uhv.edu enefits' Guard ELi col benefits ) Assurant Employee Benefits a Paycom payroll Suggested Sites. eAndysic Bad nghtfa . s related to fiscal policy which is carried out by the federal government Workshop 7B Fiscal Policy The following table shows the consumption schedule for a closed econo trade with other countries). Investment is currently $40ba 1. National income (Y) (Son) 30 60 90120 150 180 Consumption (C) (Sbn) 20 40 60 80 100 120 140 160 180 200 (a) Assuming that the government is currently spending S20bn, what is the equbrium level of national income? (b) Assuming that at this level of national income the govemment is running a budget deficit of SSbn, what must be the level of saving in this econouny? (e) What is the govemment expenditure nultiphier? Assume that full employment is achieved at a national income of $240bn (d) What is the size of the deflationary gap? (e) How much would govemment expendahare bave to be rased (assuming no change in tax rates) n order to close this gap? (0 Altematively, how smuch would taxes have to be changed (assumang no change in govemament expendatuare) in order to close this gap 2. Grve tharee problesas of usang fiscal polacy to achaeve a precise level of natsoal

Explanation / Answer

(1)

(a) Aggregate expenditure (AE) = C + I + G

In equilibrium, Y = AD, which holds true when Y = AD = $180 Billion

(b) Budget deficit of $5 Billion signifies a Public saving of (- $5 Billion).

National saving ($ Billion) = Private saving + Public saving = (Y - C) Public saving = (180 - 120) - 5 = 55

(c) Marginal propensity to consume (MPC) = Change in Consumption / Change in Y

= $(40 - 20) Billion / $(60 - 30) Billion = $20 billion / $30 billion = 2/3

Government spending multiplier = 1 / (1 - MPC) = 1 / [1 - (2/3)] = 1 / (1/3) = 3

(d) Deflationary gap ($ Billion) = Full employment income - Equilibrium income = 240 - 180 = 60

(e) Increase in government spending ($ Billion) = Deflationary gap / Sending multiplier = 60 / 3 = 20

(f) Tax multiplier = - MPC / (1 - MPC) = - (2/3) / [1 - (2/3)] = - (2/3) / (1/3) = - 2

As Tax decreases by $1, income increases by $2. Therefore, to increase income by $60 billion,

Required decrease in tax = $60 billion / 2 = $30 billion

NOTE: First question is answered.

Y ($B) C ($B) I ($B) G ($B) AD ($B) 30 20 40 20 80 60 40 40 20 100 90 60 40 20 120 120 80 40 20 140 150 100 40 20 160 180 120 40 20 180 210 140 40 20 200 240 160 40 20 220 270 180 40 20 240 300 200 40 20 260

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