1. A). False, has to be <1, can’t spend all the income.
B). True.
C). True.
2. y = c + i + g
Y = 480 + 0.5 (y – 70) + 110 + 250
= 840 + 0.5y – 35
Y = 1610
Yd = y – t = 1610 – 70 = 1540
C = 480 + 0.5 * 1540 = 1250
3.a) s= yd – c = 1540 – 1250 = 290
T – g = 70 – 250 = -180
I = S + T – G = 290 – 180 = 110
b) 1/(1-0.5) = 2
c) y = c + i + g
Y = 480 + 0.5 (y – 70) + 110 + 300
= 890 + 0.5y – 35
Y = 1710
Yd = 1710 – 70 = 1640
C= 480 + 0.5 * 1640 = 1300
4. a) Y = c + I + g
= c0 + c1(y – t0 – t1y) + I + g
= c0 + c1y – c1t0 – c1t1y + I + g
Y – c1y + c1t1y = c0 – c1t0 + I + g
(1 – c1 – c1t1) Y = c0 – c1t0 + I + g
Y = 1/ (1- c1(1 + t1)) * (c0 – c1t0 + I + g)
b) 1/ (1- c1(1 + t1)) when t1 is positive, the multiplier is larger, the
economy responds more to change in autonomous spending.
c) change the output by varying the t1 and government spending.
1. a) 1/ (1 – c1)
b) c1/ (1 – c1)
c) (1 – c1)/ (1 – c1) = 1 government spending affects demand
directly while taxes affect demand indirectly through
consumption and the mpc is less than one.
d) gdp increase by 1 unit. Not eco neutral. The model is not
perfect.
e) no effect. the balanced budget tax increase aborts the
multiplier process initiated by the increase in government
spending.
2. a) y = 1/ (1-c1 -b1) * (c0 – c1T – b0 + g)
b) multiplier is 1/ (1-c1 -b1), b1 increases the multiplier increases
b1 + c1 < 1 the numerator of multiplier should be positive.
c) multiplier would be negative which indicates that as the
autonomous value increase the output will decrease. People
invest and consume over they earn. (e.g., Spend and invest
more than $1 when income adds $1)?
d) b0 increase, the output would also increase by the size of the
multiplier, more than the change of b0, since after b0 increases
the output increases and b1* Y would also increase. Therefore,
investment will increase by more than b0. The economy would
save more since that investment = saving in equilibrium
situation.