PART A Given that the US economy production function (to calculate current GDP a

Question

PART A

Given that the US economy production function (to calculate current GDP

      and potential GDP) is : GDP = Y= F(K,L,N) = 0.04K+0.03L+0.03N. The

      current GDP is produced with K=200, L=100, and N=100, the full

      employment GDP (potential GDP) can be potentially produced with K=225,

      L=150 , and N= 150. Given that the average MPS (not MPC) is 0.25 (for

      problems 1, 2, and 3), and active population is 100 millions. GDP is in

     Trillion dollars.  How much of a tax rebate per person per year is required to

      reach the full employment level of GDP if tax rebate is planned for a total of

      5 years? You should assume that the tax rebate is only for consumers and

      stimulates consumption spending only (i.e., no changes in investment and

      government spending is desired).

Hint: First, find the GDP gap, then find out how much extra consumption spending is required to fill up this gap. Finally, how much tax rebate for the whole population and then per person per year is needed to stimulate the required additional consumption spending?

PART B

      To apply supply side economics, given that only 40% of the tax credits given to businesses are reinvested, how much tax credit do investors need to move the economy to the full employment level?  You should assume that consumption and government spending are not going to change.

Hint: First, find the GDP gap, then find out how much extra investment spending is required to fill up this gap. Finally, how much tax cut is needed for the businesses to stimulate the required additional investment spending, knowing that from every dollar of tax cut, businesses will invest only 40%?

PART C

If the government wants to impose taxes to finance government spending to   

      reach the full employment level of GDP, how much tax does the government

      need to impose? Show it quantitatively.

Hint: an application of balancedbudget multiplier

Explanation / Answer

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