add2ndprobsetans - INTRODUCTION TO MACROECONOMICS FALL 2007...

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INTRODUCTION TO MACROECONOMICS FALL 2007 ADDITION TO PROBLEM SET ANSWERS Please return to the economy where: C = -400 + .8Yd T = 100 I = 1000 G = 800 25. Suppose that we have a balanced budget increase in Government Spending and Taxes (see Case and Fair pp. 184-185) of 500 . Show what will happen to equilibrium Y? What is the new equilibrium Y ? (Please note that a balanced budget increase means an equal increase in Government Spending and Taxes, so it would be neutral from the point of view of the Government budget. You raise taxes to offset the increase in Spending exactly.) From the change in G, Y will increase by 500 . 5 = 2500 From the change in T, Y will decrease by 555 . -4 = 2000 Put them together and Y will increase by 500 from 6600 to 7100. 26. What is the relationship between the change in equilibrium Y and the balanced budget increase in G and T of 500? change in Y/change in G = change in T = 500/500 = 1 27. What is the balanced budget multiplier ? The balanced budget multiplier is 1 Please return to the economy where: C = -400 + .8Yd T = 100 I = 1000 G = 800 Now suppose that in this economy, an income tax is added equal to 10% of income. The tax function would now be T = 100 + .1Y .
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28. Write the new Aggregate Expenditure function for this economy, with the income tax.
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add2ndprobsetans - INTRODUCTION TO MACROECONOMICS FALL 2007...

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