ch.9firstprobset - 1 ECONOMICS 304L FALL 2007 PRACTICE...

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ECONOMICS 304L FALL 2007 PRACTICE QUESTIONS-CH 9 (Also see Why a Multiplier? and Adding Taxes to Our Model) 1. Suppose that the government of Lumpland is enjoying a fat budget surplus with fixed government expenditures of G = 150 and fixed taxes of T=200 . Assume that consumers of Lumpland behave as described in the following Consumption function: C = 150 + 0.75 (Y-T) Suppose further that investment spending is fixed at 100 . a. Calculate the equilibrium level of GDP in Lumpland. Solve for the equilibrium levels of Y, C and S . b. Next assume that the Republican Congress in Lumpland succeeds in reducing taxes by 20 to a new fixed level of 180 . Recalculate the equilibrium level of GDP using the tax multiplier . Solve for equilibrium levels of Y, C , and S after the tax cut and check to ensure that the multiplier worked. c. What arguments are likely to be used in support of such a tax cut? d.
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ch.9firstprobset - 1 ECONOMICS 304L FALL 2007 PRACTICE...

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