201FA06_final_answers

201FA06_final_answer - 1 The following table gives you data on disposable income consumption and taxes in 2003 and 2004 IMPORTANT you have to

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1. The following table gives you data on disposable income, consumption, and taxes in 2003 and 2004. IMPORTANT: you have to assume that the consumption function and the tax function is the same in 2003, 2004, and 2005. In this fictitious economy taxes are income dependent (T = T A + t.Y). YD C T 2003 800 600 100 2004 1000 750 150 2005 a. What is total investment in this economy in 2005, when the government runs a budget surplus of 150 in the year 2005, and equilibrium GDP equals 1800 in 2005? We assume for now that this is a closed economy. C=A+MPC*YD = 0.75*YD T= -80 + 0.2*1800 = 280 YD in 2005 = 1520 C in 2005 = 1140 I=S+T-G T-G = 150 S= 1520-1140=380 I=380+150 = 530 b. What is government spending in this economy in 2005? T = -80 + 0.2*1800 = 280, G = 280-150 = 130 Also G = 1800 – C – I = 1800 – 1140 - 530 = 130 2. (Harder) The next economy is open for trade. Exports are constant and equal to 300, and imports behave according to the following equation: IM = 10 + 0.15*Y. Investment equals 100, government spending equals 100, and taxes are fixed and also equal 100. The consumption function equals: C = 20 + 0.6*Y. a. Compute equilibrium GDP (Hint: Derive the formula for equilibrium GDP with the only change that IM is no longer a constant but depends on Y.) Y = (20 – 0.6*100 + 100 + 100 + 300 – 10) / (1 – 0.6 + 0.15) = 450 / 0.55 = 818.18 b. What is the trade balance at equilibrium GDP expressed in percentage of equilibrium GDP in 2006? 300 – 10 – 0.15*818.18 = 167.27 3. The following economy has income-dependent taxes. (T A = 100 ). Investment is constant and equals 100, government spending equals 250, exports equal 100, and imports equal 50.. Y Taxes Household Savings 400 200 110 600 250 200 a. Write down the consumption function for this economy. (C=A+MPC*YD) Row1: YD=200, C=90 Row2: YD= 350, C=150 MPC=60/150 = 0.4, A=10 C= 10 + 0.4*YD b. Write down the tax function for this economy. (T=T A + t*Y) T = 100 + t*Y 200=100+t*400, t = 0.25 T = 100 + 0.25*Y c. Calculate equilibrium GDP. Y = (A – MPC*T A + I + G + X - IM) / (1 – MPC + MPC*t) Y = (10-0.4*100+100+250+100-50) / (1-0.4+0.4*0.25) = 370/0.7=528.6 d. Calculate the government budget balance at equilibrium GDP. T-G = 100+0.25*528.6 – 250 = 232.15 – 250 = -17.85 e. By how much does equilibrium GDP change when we increase both taxes (T) and government spending by 50? Change in Y = 50*m G + 50*m T = 50/0.7 – 50*0.4/0.7 = 71.43 – 28.57 = 42.86 . f. If we want to decrease GDP by 150, by how much do we have to change imports? -150 = change in IM * m IM , change in IM = -150*(-0.7) = +105 g (Harder) Government wants to give the economy a serious boost without deteriorating the government budget too much....
View Full Document

This note was uploaded on 04/07/2008 for the course ECON 201 taught by Professor Witte during the Winter '08 term at Northwestern.

Page1 / 13

201FA06_final_answer - 1 The following table gives you data on disposable income consumption and taxes in 2003 and 2004 IMPORTANT you have to

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online