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What is the government expenditure multiplier

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Reference no: EM131720697

Assignment: Fiscal Policy

1. The following table shows the consumption schedule for a closed economy (i.e. one that does not trade with other countries). Investment is currently $40bn.

National income (Y) ($bn)

30

60

90

120

150

180

210

240

270

300

Consumption (C) (Sbn)

20

40

60

80

100

120

140

160

180

200

(a) Assuming that the government is currently spending $20bn, what is the equilibrium level of national income?

(b) Assuming that at this level of national income the government is running a budget deficit of $5bn, what must be the level of saving in this economy?

(c) What is the government expenditure multiplier? Assume that full employment is achieved at a national income of $240bn.

(d) What is the size of the deflationary gap?

(e) How much would government expenditure have to be raised (assuming no change in tax rates) in order to close this gap?

(f) Alternatively, how much would taxes have to be changed (assuming no change in government expenditure) in order to close this gap.

2. Give three problems of using fiscal policy to achieve a precise level of national income.

Reference no: EM131720697

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