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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. 184185) 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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Write the new Aggregate Expenditure function for this economy, with the
income tax.
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 Spring '08
 Ledyard
 Macroeconomics

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