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203-tutorial-4 - Econ 203 Tutorial#4 Date Week of Feb 6-12...

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Econ 203 Tutorial #4 Date: Week of Feb. 6-12 Coverage: Chapter 7 Government, Fiscal Policy and Real GDP 1. Consider the following information on the economy of Pluto: C = 150 + 0.8 Y I = 350 (i) Find the equilibrium national income Y. (ii) Find the multiplier and the value of savings (S). (iii) Suppose I increases to 450. Find the new Y and C. (iv) A government is now put in place in Pluto, with I still equal to 450. The government spends an amount G=150 and imposes a tax T=150. Only consumers pay the tax. What is the new equilibrium Y? (v) Do you like the way how T is modelled? Explain. (vi) Now suppose T=0.2Y. Only consumers pay the tax. Find the new multiplier. Explain intuitively why this new multiplier is larger/smaller than the one you found in part (ii). (vii) Use the relevant accounting identities to find the relationship amongst the variables S, I, T and G. Provide an intuitive explanation for your answer. What variables are leakages and what variables are injections?
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