I need all sections of question 2 answers to compare against my own. Use the Key

Question

I need all sections of question 2 answers to compare against my own.

Use the Keynesian cross model to predict the impact on equilibrium GDP of the following. In each ease, state the direction of the change and give a formula for the size of the impact. An increase in government purchases An increase in taxes Equal-sized increases in both government purchases and taxes Lounchpod In the Keynesian cross model, assume that the consumption function is given by C = 120 + 0.8 (Y- T). Planned investment is 200; government purchases and taxes arc both 400. Graph planned expenditure as a function of income. What is the equilibrium level of income? If government purchases increase to 420. What is the new equilibrium income? What is the multiplier for government purchases? What level of government purchases is needed to achieve an income of 2,400? (Taxes remain at 400.) What level of taxes is needed to achieve an income of 2,400? (Government purchases remain at 400.) Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, most countries levy some taxes that rise automatically with national income. (Examples in the United States include the income tax and the payroll tax.) Let's represent the tax system by writing tax revenue as T = T^bar + Y, where T and t are parameters of the tax code. The parameter t is the marginal tax rate: if income rises by SI. taxes rise by t times SI. a. How does this tax system change the way consumption responds to changes m GDP?

Explanation / Answer

a.I am extremely sorry as my system is not supporting to upload any diagram-so I am unable to answer the first part of question.

b.Since we are solving for equilibrium in this economic model we want GDP to be equal to C + I + G. We are given values for I and G, where I=200,Govt purchase and taxes are both 400.So we can say that,

Y=C+I+G,when there is no export and import.

Y=120+.8(Y-400)+200+400

Y=120+.8Y-320+200+400

Or,.2Y=720-320

Or,.2Y=400.

Or,Y=4000/2=2000.This is the equilibrium level of income.

c.Now the condition is that govt purchase is increased to 420.Now we need to find out new equilibrium income.

After change in govt purchase equilibrium income becomes,

Y=120+.8(Y-400)+200+420

Or,Y-.8Y=120+200+420-320

Or,.2Y=740-320

Or,Y=420/.2=2100.

c.Spending multiplier (also known as fiscal multiplier or simply the multiplier) represents the multiple by which GDP increases or decreases in response to an increase and decrease in government expenditures and investment.

When Y=2000,C=120+.8(2000-400)=1400.

We know,C=120+.8(Y-T).

Or,C=120+.8(2100-400)

Or,C=120+(1700*.8)

Or,C=120+1360=1480.

marginal propensity of consumption=Increase in consumption/increase in demand.

Or,mpc=1480-1400/2100-200=80/100=.8

So marginal propensity of saving=mps=1-mpc(as we know mpc+mps=1)

So,mps=1-.8=.2

Therefore spending multiplier is=1/mps=1/.2=5

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.