Data in the following table is derived from a model of an open economy with gove
ID: 1249036 • Letter: D
Question
Data in the following table is derived from a model of an open economy with
government. Although the model is not given, it is of the same form as that
examined in this course and can be derived from the information in the table.
You can think of the values in the table as being in billions of dollars.
You may wish to derive the model and to fill in the following table before
answering the following questions. Furthermore, Y* is estimated to be 900.
k) If Y increased by 100, how would the following change and by how much:
net tax revenues (T), consumption expenditure (C), S, imports (IM), and
expenditures on domestically produced products (AE)?
l) How are inventories changing and by how much if Y = 800?
m) What is the equilibrium level of Y equal to (specify to 2 decimal
places)?
n) What is the $ value of injections when the economy is at equilibrium?
o) What is the $ value of withdrawals when the economy is at equilibrium?
p) Do injections equal withdrawals when the economy is at equilibrium? If
no, redo questions m, n, and o . You’ve made a mistake somewhere.
q) Does a recessionary gap or an inflationary gap exist and what is its size
if the economy is at equilibrium?
r) Suppose the government wanted to eliminate the output gap by changing G.
Must the government increase or decrease G and by how much? Show work.
Hint: What is the size of the simple multiplier?
s) Suppose the government wanted to eliminate the output gap by changing t. Must the government increase or decrease t? What t (as a % to 2 decimal places) would eliminate the output gap? Show work.
t) What could cause A to increase? Give five different reasons.
u) What could cause the marginal propensity to import (m) to increase? Give
one reason.
v) According to the model, how would an increase in I affect Y, T, YD, C, S,
G, X, and IM? Explain.
Explanation / Answer
k,100 25 45 30 10 35 m,883.08 n,520 o,520 q,16.92
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