- Note In The Following Problem It Is Important To Show All The Steps Used To Get Your Answers Suppose An Imaginary Clo 1 (90.36 KiB) Viewed 37 times
Note: In the following problem, it is important to show all the steps used to get your answers. Suppose an imaginary closed economy is characterized by the following: = C = Co + C1 (Y -T) T = 300 Ī = 400 G=400 C is consumption, Y and Yp are, respectively, income and disposable income, T is the level of taxes, I and G, are, respectively, private investment, and government spending. Co and ci are, respectively, autonomous consumption and the marginal propensity to con- sume; their values are unknown. However, the expression for private saving, S, is as specified below. S=0.5Y - 500 1. Find the equilibrium values of GDP, consumption, disposable income, and private saving. (5 points) 2. Find the expression of the investment multiplier in terms of co and/or C1. (3 points) 3. Find the values of co and c and the value of the investment multiplier (Hint: you'll prob- ably find co is equal to an even number, which is multiple of 2). (5 points) 4. From this question on, you must use when needed the values of co and cu found in the pre- vious question. Suppose now that the government tax revenue, T, has both autonomous and endogenous components, in the sense that the tax level depends on the level of in- come. T = to +tY
to is the autonomous tax level, and ti is the marginal tax rate. Given the values of private investment and government spending mentioned above, find the expression for the equilibrium GDP in terms of co, C1, to and t1. (4 points) 5. Assuming that to = 200 find the value of the marginal tax rate that will yield the same level of equilibrium GDP as the one obtained (1). (4 points) 6. Find the expression for the investment multiplier in terms of cand tị and possibly Co, and to. (4 points) 7. Assume now that private investment, I, increases by 50. Find the change in GDP, AY, induced by the change in investment, AI = 50. (4 points) 8. The government does not like the change in GDP induced by the increase in private in- vestment. It wants to bring it back to the level found in Question (1). For that purpose, it has the options to change its spending or to change taxes. (a) If the government changes its spending alone, find the level of AG required to coun- teract the effect on GDP of the fall in investment. (4 points) (b) If the government changes instead the level of its autonomous taxes alone, find the level of At, required to counteract the effect on GDP of the fall in investment. Explain what happened. (4 points) (c) How does AG compare to Ato? Explain the difference, if there is any. (4 points) (d) In which direction should the government change its marginal tax rate, t1 (increase or decrease), if it uses it as the sole policy instrument to counteract the effect of the change in investment? Explain intuitively your answer. (4 points)