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(Solved by Expert Tutors) Assume that in a hypothetical economy with no government and no export


the following conditions exist: Consumption function = 200 + 0.6Y; Planned investment = $640 billion;

Based on the above economic information, please answer the questions below:

What is the Marginal Propensity to Consume and Marginal Propensity to Save? What will be the level of consumption if the aggregate income is equal to 0? (3 points)
???????????




What will be the equilibrium level of output given the initial conditions above? (3 points)






What are the levels of consumption and saving under this equilibrium level of output? (2 points)

Consumption =
Saving =

In terms of leakages-injections approach to equilibrium output, what condition should be true in order for economy to be in equilibrium? (1 point)




What will be the new equilibrium output if planned investment goes up by $20 billion? (2 points)










Calculate the size of planned investment multiplier and interpret this number. (4 points)


Section 2a (13 points).
Assume that in a hypothetical economy with no exports the following conditions exist:
Consumption function = 200 + 0.6Y; ??????????? Planned investment = $640 billion;
Government spending = $480 billion; ??????????? Lump-sum taxes = $500 billion;

Based on the above information, please answer the questions below:

What will the new consumption function look like with the appearance of the government in the economy? (1 point)

Cnew =

What will be the equilibrium level of output given the above levels of the government spending and the lump-sum taxes? (3 points)








What are the levels of consumption and saving under this equilibrium output? (2 points)

Consumption =
Saving =

In terms of leakages-injections approach to equilibrium output, what condition should be true in order for economy to be in equilibrium? (1 point)



What will be the new equilibrium output if government increases spending by $40 billion and leaves lump-sum taxes unchanged at $500 billion? (2 points)







Calculate the size of government spending multiplier and interpret this number. (4 points)




Section 2b (12 points).
Assume that in a hypothetical economy with no exports the following conditions exist:
Consumption function = 200 + 0.6Y; ??????????? Planned investment = $640 billion;
Government spending = $480 billion; ??????????? Lump-sum taxes = $500 billion;

Based on the above economic information, please answer the questions below:

What will be the new equilibrium level of output if federal government reduces the lump-sum taxes by $50 billion and leaves the spending unchanged at $480 trillion? (2 points)








Calculate the size of tax multiplier and interpret this number. (4 points)









What will be the new equilibrium level of output if federal government simultaneously increases spending and lump-sum taxes by $80 billion, i.e. to $560 billion and $580 billion respectively? (2 points)








Calculate the size of balanced budget multiplier and interpret this number. (4 points)





 


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Apr 19, 2020

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