Government of Econia decides to stimulate the economy to reach its potential by

Question

Government of Econia decides to stimulate the economy to reach its potential by increasing Government expenditure on infrastructure - transit, highways, bridges, and community services what would the Government of Econia's new revised level of Autonomous expenditure be? (3 Marks) 1. The table below provides 2018 values for Marginal Propensities and Autonomous Expenditures for the hypothetical Principality of ECONIA Variables Autonomous Consumption, co Marginal Propensity to Consume, MPC Rate of Tax on Income, t Autonomous Investment, lo Autonomous Government Expenditure, G Autonomous Exports, Xo Marginal Propensity to Import, MPIM 2018 Values $65.0 0.93 0.42 214.0 175.0 625.0 0.45 a. Using the values given in the table above, determine Econias estimated "Multiplier" value for 2018. (4 Marks) b. Briefly explain the "Multiplier" effect in the economy of the Principality of Econia in relation to the estimated Autonomous Expenditure values. (2 Marks) Using the values given in the table above, determine Econias estimated total expenditures- GDP- for 2016. (2 Marks) c. d. Using the values in the table above, and the calculation from part c, determine both the total value of Consumption Expenditure AND the total value of Saving for the Ecgnian economy. (3 Marks) e. Using the values in the table above, and the calculation in part c, determine the Government of Econia's Budget Balance. Explain briefly if the Government's budget is in surplus, in deficit, or in balance and why. (3 Marks) f. Using the values in the table above, and the calculation in part c, determine the trade balance for the economy of Econia. Explain briefly if the trade balance is in surplus, in deficit, or in balance and why. (3 Marks) g Suppose that the Government of Ecania believes that the economy is operating below its potential value by $75.0. If the

Explanation / Answer

(E)

C = 65 + 0.93(Y - 0.42Y) = 65 + 0.93 x 0.58Y = 65 + 0.54Y

M = 0.45Y

In equilibrium,

Y = C + I0 + G0 + X0 - M

Y = 65 + 0.54Y + 214 + 175 + 625 - 0.45Y

(1 - 0.54 + 0.45)Y = 1,079

0.91Y = 1,079

Y = 1,185.71

Therefore,

Tax revenue (T) = tY = 0.42 x 1,185.71 = 498

Budget balance = T - G0 = 498 - 175 = 323

Since budget balance is positive, there is a budget surplus.

(F)

M = 0.45Y = 0.45 x 1,185.71 = 533.57

Trade balance = X0 - M = 625 - 533.57 = 91.43

Since trade balance is positive, there is a trade surplus.

(G) Required increase in real GDP = Negative output gap = 75

Multiplier = 1 / [1 - MPC x (1 - t) + MPIM] = 1 / [1 - 0.93 x (1 - 0.42) + 0.45] = 1 / (1.45 - 0.54) = 1 / 0.91 = 1.0989

Required increase in autonomous expenditure = 75 / 1.0989 = 68.25

New level of autonomous expenditure = (65 + 214 + 175 + 625) + 68.25 = 1,147.25

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