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Unformatted text preview: Department of Economics Spring 2011 University of California Economics 1 Berkeley Head GSI: Swetha Doraiswamy Section Exercise 17 For 4/5/11 & 4/6/11 1) You have been called in by the Arbocali Minister of Finance. The full-employment level of output is 124,000 opeks. She tells you that an econometrician has provided the following model of the Arbocali economy. The currency is opeks. Consumption function: C = 6,000 + 0.75 Y d Investment function: I = 11,000 Government spending: G = 20,000 Net taxes: T = 16,000 Disposable income: Y d = Y – T Equilibrium: Y = C + I + G a. Calculate the current equilibrium income level. Note that Y = C + I + G in equilibrium in this economy. Typically, our model tells us that Y = C + I + G + NX in equilibrium, but we can think of Arbocali’s economy as a closed economy, with no international trade, so NX = 0. However, on an exam, always use Y = C + I + G + NX to determine equilibrium income. Y = C + I + G +NX = 6,000 + 0.75 Y d + 11,000 + 20,000 +0 (NX = 0) = 37,000 + 0.75 Y d Y d = Y – T, so: Y = 37,000 + 0.75(Y – T) = 37,000 + 0.75Y – 0.75*16,000 => 0.25Y = 25,000 => Y* = 100,000 b. Determine the value of the government spending multiplier and the tax multiplier. To determine the value of the government spending multiplier and tax multiplier, you will need to identify the marginal propensity to consume (mpc). You can locate this in the above equation for consumption, C = 6,000 + 0.75 Y d . This tells you that households consume 75% of each additional dollar of disposable income, so mpc = 0.75. Q1: Case and Fair, Chapter 24 Page 1 of 5 Q2: Olney, Macroeconomics as a Second Language, Chapter 8 Department of Economics Spring 2011 University of California Economics 1 Berkeley Head GSI: Swetha Doraiswamy The equation for the government spending multiplier is: G multiplier = 1 1- mpc = 1 1- 0.75 = 1 0.25 = 4 The equation for the tax multiplier is: T multiplier = - mpc 1- mpc...
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This note was uploaded on 04/26/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.
- Fall '08