In a closed economy, investment is autonomous at a level of £500, while consumption is comprised of autonomous consumption of £50, as well as 90% of disposable income. There is no government sector.
(a)What is the equilibrium level of income?[5 marks]
(b)What would equilibrium income be if investment increased by £50?
[5 marks]
(c)Explain what the multiplier of an economy is and calculate the value of the multiplier in this economy, given the change in investment. [6 marks]
Now suppose that that the government levies direct taxes of 10% of income and undertakes expenditure of £250, with investment back at £500:
(d)What is the equilibrium level of income?[3 marks]
(e)Is the government running a budget deficit or surplus?[2 mark]
(f)Calculate the value of the multiplier with the government sector.[4 mark]
(g)Explain why your answers to (c) and (f) differ?[4 marks]
2.It is estimated that a particular economy has a multiplier of 2. The marginal propensity to import of the economy is 0.3, while the consumer's marginal propensity to save is 0.2.
(a)Find the marginal tax rate of this economy. [6 marks]
(b)The marginal propensity to import increases from 0.3 to 0.4. Find the new multiplier of the economy and explain why the multiplier has changed.
[6 marks]
Document Preview: Introduction to Economics
Assignment
1. In a closed economy, investment is autonomous at a level of £500, while consumption is comprised of autonomous consumption of £50, as well as 90% of disposable income. There is no government sector.
What is the equilibrium level of income? [5 marks]
What would equilibrium income be if investment increased by £50?
[5 marks]
Explain what the multiplier of an economy is and calculate the value of the multiplier in this economy, given the change in investment. [6 marks]
Now suppose that that the government levies direct taxes of 10% of income and undertakes expenditure of £250, with investment back at £500:
What is the equilibrium level of income? [3 marks]
Is the government running a budget deficit or surplus? [2 mark]
Calculate the value of the multiplier with the government sector. [4 mark]
Explain why your answers to (c) and (f) differ? [4 marks]
2. It is estimated that a particular economy has a multiplier of 2. The marginal propensity to import of the economy is 0.3, while the consumer's marginal propensity to save is 0.2.
Find the marginal tax rate of this economy. [6 marks]
The marginal propensity to import increases from 0.3 to 0.4. Find the new multiplier of the economy and explain why the multiplier has changed.
[6 marks]
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