Suppose an imaginary closed economy is characterized by the following: C = co+ (Y-T) T= to...

 

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Suppose an imaginary closed economy is characterized by the following: C = co+ (Y-T) T= to +₁Y 1 <= 300 G=300 C is consumption, Y and Yp are, respectively, income and disposable income, T is the level of taxes, and I and G, are, respectively, private investment, and government spending. co and care, respectively, autonomous consumption and the marginal propensity to con- sume; their values are unknown. However, the expression for private saving, 5, is as specified below, where sy is the marginal propensity to save out of total income. S=0.4Y-500 1. Assuming that the marginal tax rate, t₁, is equal to 0.1 and the equilibrium GDP is 2000, find the level of autonomous taxes, to, the equilibrium values of consumption, disposable income, and private saving. (10 points) 2. Find the expression of the investment multiplier in terms of co and/or c₁. (5 points) 3. Find the values of co and c₁ and the value of the investment multiplier. (5 points) 4. Assume now that private investment, I, decreases by 50: AI = -50. Find the change in GDP, AY, induced by the change in investment. (5 points) 5. The government does not like the change in GDP induced by the increase in private in- vestment. It wants to bring it back to the level found in Question (1). For that purpose, it has the option to change its spending or its taxes." (a) If the government changes its spending alone, find the level of AG required to offset the impact of the decline in investment on GDP. (5 points) (b) If the government instead changes only the level of its autonomous taxes, find the level of Ato required to offset the impact of the decline in investment on GDP. Ex- plain what happened. (5 points) Suppose an imaginary closed economy is characterized by the following: C = co+ (Y-T) T= to +₁Y 1 <= 300 G=300 C is consumption, Y and Yp are, respectively, income and disposable income, T is the level of taxes, and I and G, are, respectively, private investment, and government spending. co and care, respectively, autonomous consumption and the marginal propensity to con- sume; their values are unknown. However, the expression for private saving, 5, is as specified below, where sy is the marginal propensity to save out of total income. S=0.4Y-500 1. Assuming that the marginal tax rate, t₁, is equal to 0.1 and the equilibrium GDP is 2000, find the level of autonomous taxes, to, the equilibrium values of consumption, disposable income, and private saving. (10 points) 2. Find the expression of the investment multiplier in terms of co and/or c₁. (5 points) 3. Find the values of co and c₁ and the value of the investment multiplier. (5 points) 4. Assume now that private investment, I, decreases by 50: AI = -50. Find the change in GDP, AY, induced by the change in investment. (5 points) 5. The government does not like the change in GDP induced by the increase in private in- vestment. It wants to bring it back to the level found in Question (1). For that purpose, it has the option to change its spending or its taxes." (a) If the government changes its spending alone, find the level of AG required to offset the impact of the decline in investment on GDP. (5 points) (b) If the government instead changes only the level of its autonomous taxes, find the level of Ato required to offset the impact of the decline in investment on GDP. Ex- plain what happened. (5 points)