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You are given the following information about the economy in 2010 (all in billions of dollars): Consumption function: C = 100 + (.8 *Yd) Taxes: T = -150 + (.25*Y) Investment function: I = 60 Disposable income: Yd = Y - T Government spending: G = 80 Equilibrium: Y = C + I + G
Hint: Deficit is D = G - T = G - [-150 + (.25*Y)].
a. Find equilibrium income. Show that the government budget deficit (the difference between government spending and tax revenues) is $5 billion.
b. Congress passes the Foghorn-Leghorn (F-L) amendment, which requires that the deficit be zero this year. If the budget adopted by Congress has a deficit that is larger than zero, the deficit target must be met by cutting spending. Suppose spending is cut by $5 billion (to $75 billion).What is the new value for equilibrium GDP?
What is the new deficit? Explain carefully why the deficit is not zero. c. Suppose the F-L amendment was not in effect and planned investment falls to I = 55.What is the new value of GDP?
What is the new government budget deficit? What happens to GDP if the F-L amendment is in effect and spending is cut to reach the deficit target? (Hint: Spending must be cut by $21.666 billion to balance the budget.)
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Poverty among the elderly fell dramatically between 1959 and 1974 and has continued to decline. However, poverty among that portion of the US population that is less than 18 years old is no lower today than in the 1970s.
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To finance this subsidy every pair of stilts purchased by someone who is tall is taxed at a rate of T percent.
If increased government spending and tax cuts were equally effective in stimulating aggregate demand, which fiscal tool would you select? Why?
Ellucidate why is it that wages are not dropping instead they are inching upward on a year to year basis.
Elucidate how the steepness of the short run aggregate supply curve affects the government's ability to use fiscal policy to change real GDP.
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