Investment and government spending exogenous
Course:- Business Economics
Reference No.:- EM13795678

Assignment Help
Assignment Help >> Business Economics

Consider the following simple model with investment and government spending exogenous:

Y = C + I + G

C = a + bYd

Disposable income Yd is given by Y - T where T is total taxes. Suppose that taxes are not directly related to income, so that T can be increased or decreased independent of income.

a. Derive the change in Y associated with an increase in taxes T. Show the results graphically and algebraically. What is the tax multiplier?

b. Now increase government spending G and taxes T by the same amount. For this change, the balanced government budget deficit G - T does not change. If the budget was balanced before, it will still be balanced. What happens to income Y in this case? Perhaps surprisingly, it increases. Calculate by how much. The result is called the balanced budget multiplier.

Put your comment

Ask Question & Get Answers from Experts
Browse some more (Business Economics) Materials
What are the short run and long run effects of a one-time increase in the stock of labor (because of, for example, a particularly large cohort of college graduates joining the
Individuals A and B are the only consumers of good X. Individual A demand for good X is given by: Q = 4 – P and individual B demand for good X is given by: Q = 8 – 2P. The sup
Describe a situation in which autocorrelation might be present and which of the three methods of detecting autocorrelation you would leverage. Explain your rationale. Describe
Brazil is the world's largest coffee producer. There was a severe drought in Brazil in 2013-2014 that damaged Brazil's coffee crop. The price of coffee beans doubled during th
The Future Flight Corporation manufactures a variety of frisbees selling for $2.98 each. Sales have averaged 10,000 units per month during the last year. Recently Future Fligh
Fred was suffering from a nasal tissue blockage that could be corrected either through an operation or with medical treatment for about two months. Fred's doctor clearly told
A 20 year coupon bond with face value $100,000 and a 4% coupon rate has a yield to maturity i = 0.08. What is the value of the annual coupon payment? What is the price of this
Suppose that government wishes to affect the level of aggregate demand in the economy. All of the following, except one, are consistent policy measures. Which is the exception