On the planet Omicron Persei 8, government spending is $1000, net taxes are $120

Question

On the planet Omicron Persei 8, government spending is $1000, net taxes are $1200, and planned investment is $1400. Consumers spend according to the equation C = 100 + 0.8Yd, where Yd represents disposable income. Given this information, fill out the table below to determine which of the output levels represents a macroeconomic equilibrium, then answer the questions that follow. Output (Income) Y Net Taxes T Disposable Income Yd Consumption C Planned Investment I Government Purchases G Planned Aggregate Expenditure AE Unplanned Inventory Change 6200 1200 5000 3850 1400 1000 6250 -50 6700 1200 5500 4225 1400 1000 6625 75 7200 1200 6000 4600 1400 1000 7000 200 7700 1200 6500 4975 1400 1000 7375 325 8200 1200 7000 5350 1400 1000 7750 450 a. Which level of output is a macroeconomic equilibrium? There is no level of equilibrium based on the inventory levels. b. Is the government budget balanced, in deficit, or in surplus, and by how much? Since the government is spending less than it is collecting in taxes, we are showing a surplus. c. Find the marginal propensity to consume, and the marginal propensity to save. d. Find the government spending multiplier. If the government wanted to increase the equilibrium level of income by $1,000, by how much would it have to increase government purchases? e. Find the tax multiplier. If net taxes were lowered by $100, what affect would it have on the equilibrium level of income? Give a specific numerical answer.

Explanation / Answer

a.Which level of output is a macroeconomic equilibrium? There is no level of equilibrium based on the inventory levels. No equilibrium because there is unplanned inventory. b. Is the government budget balanced, in deficit, or in surplus, and by how much? Surplus by $200. Since the government is spending less than it is collecting in taxes, we are showing a surplus. c. Find the marginal propensity to consume, and the marginal propensity to save. MPC + MPS = 1. MPC = 0.8. MPS = 1-0.8 = 0.2 d. Find the government spending multiplier. Change in Y = 1/(1-MPC)*(change in government spending) = [1/(1-0.8)]*1000 If the government wanted to increase the equilibrium level of income by $1,000, by how much would it have to increase government purchases? e. Find the tax multiplier. Change in Y = [1/(1-MPC)]*(Change in taxes)*MPC = [1/(1-0.8)]*0.8*1200 If net taxes were lowered by $100, what affect would it have on the equilibrium level of income? Give a specific numerical answer. Taxes lowered by $100 --> change in taxes = $1100. --> Use the tax multiplier. Change in Y = [1/(1-MPC)]*(Change in taxes)*MPC = [1/(1-0.8)]*0.8*1100 --> We got change in Y.

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

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