What economic problem might exist for the government

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Reference no: EM13154475

Table 1 represents an economy that has taxes and government spending but is not yet open to trade.

1	2	3	4	5	6	7
GDP	Taxes	DI	C	I	G	C + I+ G
1200	200	..	900	200	300	1400
1450	..	..	1100	..	..	..
1700	..	..	1300	..	..	..
1950	..	..	1500	..	..	..
2200	..	..	1700	..	..	..
2450	..	..	1900	..	..	..
2700	..	..	2100	..	..	..

Taxes in the economy are lump-sum (fixed), so you can easily complete the rest of column (2).

Investment and government spending are both independent of GDP (constant), so you can fill in the rest of columns (5) and (6) as well.

Complete the disposable income entries in column (3).

Calculate total spending for the economy in column (7).

What is the equilibrium level of GDP in the economy?

When the economy is at equilibrium, what is the level of saving? When the economy is at equilibrium, investment should equal saving. Now that the government is included, we have to allow for the possibility of government saving. Government saving is equal to T - G. (If the difference between T and G is negative, then the government is borrowing, or running a deficit.)

Determine if I = S + (T - G) when the economy is at equilibrium.

What is the value of the MPC?

What is the value of the expenditure multiplier?

What is the value of the tax multiplier?

If the government increases spending by $100, what would be the new equilibrium value of GDP?

What economic problem might exist for the government to make this fiscal policy change?

If the government wanted to achieve the same change in GDP as in part k by cutting taxes instead, how large would the tax cut have to be?

Reference no: EM13154475

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