ECON304 - Assignment05 - F10

# ECON304 - Assignment05 - F10 - 'j Sonoma State University...

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'j Sonoma State University Department of Economics ECONOMICS 304 Florence Bouvet Assignment 5 Due Date: November 30 th at the beginning of lecture I) Keynesian Cross Model: Suppose the president would like to stimulate the level of output in the economy by introducing a tax cut. However, he also would like to keep a balanced budget if possible. Let's consider if these two objectives can be consistent with each other. Assume a consumption function C = 100 + O.75(Y-T), and let G = 100,' T = 100, I = 100 (investment is not a function here of the interest rate). a) First, suppose there is just a tax cut alone, lowering T from 100 to 90. Use the Keynesian Cross model and the tax multiplier to compute the change in output. Compute also the effect on government saving (budget balance). Will the president be satisfied (did he get a rise in output and a balanced government budget)? b) Now suppose he combines the tax cut with spending cuts to keep the budget balanced. So supposed taxes and government spending both are cut from 100 to 90. What is the

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## This note was uploaded on 04/07/2011 for the course ECON 304 taught by Professor Eyler during the Fall '07 term at Sonoma.

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ECON304 - Assignment05 - F10 - 'j Sonoma State University...

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