Textbook_Solutions_chpt3

B 7 yc0c1ydig implies y11 c1c1t1c0 c1t0ig c 6 a b 5

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Unformatted text preview: 1+c1t1)][c0-c1t0+I+G] c. 6. a. b. 5. The propensity to consume has no effect because the balanced budget tax increase aborts the multiplier process. Y and T both increase by one unit, so disposable income, and hence consumption, do not change. The propensity to consume is likely to be higher for low-income taxpayers. Therefore, tax cuts will be more effective at stimulating output if they are directed toward low-income taxpayers. a. Y = C + I+ G Y=[1/(1-c1-b1)]*[c0-c1T+b0+G] b. Including the b1Y term in the investment equation increases the multiplier. Increases in autonomous spending now create a multiplier effect through two channels: consumption and investment. For the multiplier to be positive, the condition c1+b1<1 is required. c. Output increases by b0 times the multiplier. Investment increases by the change in b0 plus b1 times the change in output. The change in business confidence leads to an increase in output, which induces an additional increase in investment. Since investment increases, and saving equals investment, saving must also increase. The increase in output leads to an increase in saving. Explore Further 9. a. Output will fall. b. Since output falls, investment will also fall. Public saving will not change. Private saving will fal...
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