The following equations describe a particular macroeconomic system:C = 100, XXXXXXXXXXYI = 85,000G =...

Question

The following equations describe a particular macroeconomic system:
C = 100, XXXXXXXXXXY
I = 85,000
G = 15,000
Assume, to start, that there are no taxes. Find the equilibrium level of aggregate output Y. Check your solution. What is the multiplier in this economy? If the full employment level of aggregate output is 1,010,000, how much would the government have to increase or decrease its spending to bring aggregate demand into line with Y_fe?
2. The following equations describe a particular macroeconomic system:
C = 100, XXXXXXXXXXY_d
I = 85,000
G = 15,000
T = .06Y
Find the equilibrium level of aggregate output Y; the economy’s tax bill T; the level of disposable income Y_d; consumption spending C; and the level of Saving when the economy is in equilibrium. Check your results and illustrate the solution in a diagram.
What is the multiplier in this economy?
If the full employment level of aggregate output is 740,000, how much would the government have to increase or decrease its spending to bring aggregate demand into line with Y_fe?
Suppose the tax code were altered to include a tax credit for households at low level of incomes, so that the fourth equation were now:
T = –2, XXXXXXXXXXY
Find the new equilibrium level of aggregate output Y; the economy’s tax bill T; the level of disposable income Y_d; consumption spending C; and the level of Saving when the economy is in equilibrium. Check your results.
3. A bond has a coupon payment of $100; interest is paid and compounded annually. It will mature in three years. Its face value is $1,000 and the yield on bonds of similar risk and maturity is 7.5%. What will be the price of this bond? Suppose the market rate of interest rose to 12%; what would happen to the price of the bond?

005_mxm3jk-mu2t2xhx.doc

David · Accepted Answer

Economics 3341
Economics 3341
             Gary Mongiovi
Exercise Set 2
                 Fall       2012
Due Thursday November 15
1.
The following equations describe a particular macroeconomic system:
C = 100,000 + .85Y
I = 85,000
G = 15,000
Assume, to start, that there are no taxes. Find the equilibrium level of aggregate output Y. Check your solution. What is the multiplier in this economy? If the full employment level of aggregate output is 1,010,000, how much would the government have to increase or decrease its spending to bring aggregate demand into line with Yfe?
Answer:
Consumption function: C = 100,000 + .85Y, implies mpc = 0.85
At equilibrium, Y = C+ I+G i.e.
Y = 100,000 + .85Y + 85,000 + 15000 or
0.15Y = 200000, implies equilibrium level of aggregate output Y* = $1333333
Multiplier = 1/(1-mpc) = 1/(1-0.85) = 6.666667
Given that full employment level of GDP = $1010000 and the current level of GDP = $1333333, so the difference is $323333.3 i.e. the current GDP level is exceeding potential level of GDP by $323333.3.
So we would like to reduce the current GDP by $323333.3 i.e. required change in the GDP = -$323333.3
We know that multiplier = change in GDP/change in government expenditure
Given change in GDP = -$323333.3and multiplier = 6.666667
The required change in government expenditure = -323333.3/6.666667 = -$48499.99 i.e. to achieve the potential level of GDP, the government needs to reduce its spending by $48499.99.
2.
The following equations describe a particular macroeconomic system:
C = 100,000 + .85Yd …………… (1)
I = 85,000
G = 15,000
T = .06Y
Find the equilibrium level of aggregate output Y; the economy’s tax bill T;

The following equations describe a particular macroeconomic system: C = 100, XXXXXXXXXX Y I = 85,000 G = 15,000 Assume, to start, that there are no taxes. Find the equilibrium level of aggregate...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment