Derive and explain the kind of budget implemented

Reference no: EM133219403

Questions -

Q1 - i) What is cyclically adjusted budget deficit?

ii) Assuming the UK economy taxes and government spending at equilibrium level of output for 2021 is each £7 trillion, use the cyclically adjusted budget deficit formula [G(ye) - T(ye) ≡ [G(yt) - T(yt)] - a(ye - yt)] to work out questions 'a to d' below. (Hint: T = taxes net of transfers; and alpha (α) = 1; consumption and investment are assumed unchanged):

(a) Derive and explain the kind of budget implemented by the UK government and by how much if actual output generated is £5.0 trillion (show all workings)

(b) Derive and explain the kind of budget implemented by the UK government and by how much if actual output generated is £12.0trillion (show all workings)

(iii) Use the 3-equation model to discuss whether contractionary fiscal policy should be used in the case where the UK economy is at an initial aggregate demand equilibrium (£10 trillion), but in the last few months experienced a year-on-year positive shock (£1.5 trillion) to aggregate demand from improved consumer confidence.

Reference no: EM133219403

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