6. Study Questions and Problems #6 Consider an economy that is operating at the full-employment level of real GDP with MPC= 0.9. The short-run effect on equilibrium real GDP of a $50 billion increase in government spending (G), balanced by a $50 billion increase in taxes, is a in real GDP. billion
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- 3@ An economy has neither imports nor income taxes. The MPC is 0.75 and the real GDP is $120 billion. The government increases expenditures by $4 billion. The multiplier is _____ and the change in real GDP from the increase in government expenditures is _____ billion.Suppose that the government allocates $1 billion for new roads. It also raises taxes by $1 billion to keep the deficit from growing. The absolute value of the government purchase multiplier is 3.33 and that of the tax multiplier is 2.33. What is the effect on equilibrium GDP? GDP does not change. ● GDP increases by $ 2.33 billion. GDP increases by $3.33 billion ⒸGDP increases by $1 billion.Figure 3-3 45° Planned Expenditure 200 + 0.75Y 45 Income (Y) In the figure above: a. Find the equilibrium GDP. What happens to the left of that equilibrium? What happens to the right? b. When income is $1,000, what is the unplanned inventory? c. What is the GDP multiplier? d. What is the tax multiplier? e. How much should government expenditures increase if the government wants to increase GDP from the equilibrium level found at point a) to 1,000? f. How much should taxes decrease if the government wants to increase GDP from the equilibrium level found at point a) to 1,000? Planned Expenditure
- Potential GDP 450 C+l+G+X-IM) F T 4,000 5,000 6,000 Real GDP (billions of dollars per year) In Figure 11-1, the slope of the expenditures schedule is 0.75, and the govemment wishes to achieve full employment. It should cut spending by 1,000. increase spending by 250. cut taxes by 1,000. cut taxes by 250. increase spending by 1,000. Real ExpenditureQUESTION 40 Assume the economy is in a recession and real GDP is below its potential level of output. The MPC is .75, and the government increases spending by $100billion. How much will aggregate expenditures rise? A) $100 billion B) $75billion C) $400billion D)$133 billion5. If an economy has a recessionary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP by taxes or government expenditures.
- 14 If government spending and taxes both change by the same amount, how much must they change to eliminate the recessionary gap? 15. Suppose the MPC is .90 and the MPI is .10. If govern- ment expenditures go up $100 billion while taxes fall7. Deriving and exploring the total expenditures curve The following graph shows total production (TP) and the level of Natural Real GDP (NRGDP) for a hypothetical economy. When Real GDP is $450 billion, consumption is $375 billion, government purchases are $30 billion, and investment is $70 billion. When Real GDP is $500 billion, consumption is $400 billion, government purchases are $30 billion, and investment is $70 billion. Use the blue line (circle symbol) to plot the economy's total expenditure function within a simplified Keynesian framework. TOTAL EXPENDITURE (Billions of dollars) 600 575 550 525 500 475 450 425 400 400 TP O 425 X NRGDP O 450 475 500 525 REAL GDP (Billions of dollars) 550 575 600 TE (?QUESTION 3 A recessionary expenditure gap is the amount by which aggregate expenditures at the full-employment GDP: O divided by the multiplier equal those required to achieve the full-employment GDP. equal those required to achieve the full-employment GDP and net exports. equal those required to achieve the nominal GDP and net exports. exceed those required to achieve the full-employment GDP O fall short of those required to achieve the full-employment GDP.
- Assume that Equilibrium GDP is $4,000 billion. Potential GDP is $5,000 billion. The marginal propensity to consume is 4/5 (0.8). By how much and in what direction should government purchases be changed? a. increase by $1,000 billion b. increase by $100 billion c. decrease by $1,000 billion d. increase by $200 billion1. The government expenditure multiplier is the effect of a change in government expenditure (G) on goods and services: a. An increase in aggregate expenditure increases aggregate demand (AD), which increases real GDP, which induces an increase in consumption expenditure (C), and which further increases aggregate demand (AD). b. An increase in aggregate expenditure increases aggregate supply (AS), which increases real GDP, which induces an increase in consumption expenditure (C), and which further increases aggregate supply (AS). c. An increase in aggregate expenditure decreases aggregate demand (AD), which decreases real GDP, which induces an decrease in consumption expenditure (C), and which further decreases aggregate demand (AD). d. An increase in aggregate expenditure decreases aggregate supply (AS), which decreases real GDP, which induces an decrease in consumption expenditure (C), and which further decreases aggregate supply (AS). 2. How do banks create money? Group of…Gross Real GDP (after taxes) Investment $10 10 ITTIT 20 10 10 10 10 10 10 40 70 100 130 160 Consumption $-20 100 K Net exports +5 45 Government purchaies $15 7. Refer to the above table. If the full-employment real GDP is $70 the 15 15 15 15 15 15 OA) A. inflationary expenditure gap is $30. OB) B. recessionary and inflationary expenditure gaps are both $0. OC) C. inflationary expenditure gap is $10. OD) D. recessionary expenditure gap is $10.