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G3_Sample_Problems_Corrected_[1]

# G3_Sample_Problems_Corrected_[1] - equilibrium income Raise...

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Sample Questions for G (3) Assume that all taxes in the economy are autonomous and the values for planned investment, government expenditures, and autonomous taxes are given: Ip =100 G =100 T = 50 The consumption function is C = 50 + 0.6YD What is the level of consumption when the level of income is 850? C = 50 + 0.6 (850-50) = 530 What is the level of unintended inventory investment when income is 850? 530 + 100 + 100 = 730 Y – Ep = 850 – 730 = 120 What is the equilibrium level of GDP? Y = 50 + 0.6(Y-50) + 100 +100 Y = 550 What is the equilibrium level of GDP if taxes are reduced by 10? Y = 50 + 0.6(Y-40) + 100 + 100 = 565 (N.B. the tax multiplier is one less than the spending multiplier.) What will be the effect of a fall in the marginal propensity to import on the multiplier and

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Unformatted text preview: equilibrium income? Raise the multiplier and the equilibrium income Assume that the marginal propensity to consume equals 0.9, the income tax rate equals 0.4 and the marginal propensity to import equals 0.2. What are the marginal leakage rate and the size of the multiplier? MLR = (0.1)(1-0.4) + 0.4 + 0.2 = 0.66 The multiplier = 1/0.66 = 1.52 In the consumption function suppose Ca = 50, c = 0.65, Y = 4,000 and T = 900. Consumption expenditure is 50 + 0.65(4,000-900) = 2065 Suppose that equilibrium income is 4500 and the multiplier is 1.46. Equilibrium income would rise to 4900 if government spending rises by ____. 400/1.46 = 273.97 The IS curve represents equilibrium in the commodity market for every combination of interest rate and what? Output level....
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