Question

Given the following model of the economy

C=6324+0.8YD
​I=4820
G=9519
T=10011
​ If your answer is not a whole number, round at 2 decimal places. If your answer is negative, enter a minus sign before the number. Note: Answer all parts, a-k: a) The equilibrium value of Y=$
a) What is the equilibrium value of Y ?
b) What is the value of autonomous consumption (cₒ)
c) What is the value of MPC?
d) What is the value of MPS?
e) What is the value of APC ?
f) What is the value of APS? f)
g) Calculate private saving, public saving and national saving.
h) Calculate the multiplier.
i) What happens to the equilibrium value of Y if G increases by $150
j) What happens to the equilibrium value of Y if T increases by $150, and G remains at its original h) The multiplier = value of 9519?
What happens to the equilibrium value of Y if both G&T increase by $150 from their original amounts?

Answer 1

Increasing both government spending (G) and taxes (T) by $150 will affect the equilibrium national income (Y), with the net effect depending on the fiscal multiplier. The changes in G tend to stimulate the economy, while changes in T could dampen this effect; however, typically a net increase in Y is observed due to the multiplier effect.

Step-by-step explanation:

When government spending (G) and taxes (T) both increase by $150, the equilibrium level of national income (Y) in this economy is impacted by the fiscal multiplier. We start with the aggregate expenditures model: AE = C + I + G + X - M. Consumption (C) is given by the equation C = 400 + 0.85(Y - T), and the marginal propensity to withdraw (savings, taxes, and imports) can be derived from the information provided. The formula to find the multiplier is 1 / (1 - MPC + MPT + MPM), where MPC is the marginal propensity to consume, MPT is the marginal propensity to tax, and MPM is the marginal propensity to import.

Increasing G and T by the same amount has a different effect. Since some of the increase in T is saved and not all of it translates to an increase in C, the impact on Y will not be one-for-one. However, with a higher G spending, assuming no crowding out, this can still lead to an increase in AE and subsequently Y. Considering the multiplier effect, although taxes would dampen the increase, the higher G portion will likely result in a net increase in Y if the multiplier is greater than 1.