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GDP 1250 1500 1750 2000 2250 2500 2750 Taxes 200 200 200 200 200 200 200 DI 1050 1300 1550 1800 2050 2300 2550 C I 800 1000 1200 1400 1600 1800 2000

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GDP Taxes DI C I G C+I+G 1250 200 1050 800 300 200 1300 1500 200 1300 1000 300 200 1500 1750 200 1550 1200 300 200 1700 2000 200 1800 1400 300 200 1900 2250 200 2050 1600 300 200 2100 2500 200 2300 1800 300 200 2300 2750 200 2550 2000 300 200 2500 1. Calculate the Disposable Income (DI) at each level of GDP. DI= GDP – Taxes 2. Calculate total spending (C+I+G) at each level of GDP. See above 3. What is the equilibrium level of GDP in the economy? Equilibrium is where GDP = C+I+G This is at GDP of: 1500 4. When the economy is at equilibrium, what is the level of saving? Zero. 5. What is the value of the MPC? After tax MPC= 0.8 6. What is the value of the expenditure multiplier? M=0.2 7. What is the value of the tax multiplier? -960/240 8. If the government increases spending by $100, what would be the new equilibrium value of GDP? 2000 200 1800 1400 300 200 1900 9. If the government wanted to achieve the same change in GDP as in part 8 by cutting taxes instead of increasing spending, how large would the tax cut need to be? ANSWER: 100
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GDP
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2750 Taxes
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2550 C I
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