PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 13, Problem 13.1CC
To determine
Construct a table using the given consumption functions.
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You are given the following data concerning Freedonia, a new republic.
1) Consumption is 200 when income is zero and the marginal propensity to consume is 0.6 out of every dollar increase in income
2) Investment function: I = 200
3) AE ≡ C + I
4) AE = Y
Derive the savings function?
Graph equations 3) and 4) and solve for equilibrium income (Y).
Suppose equation 2) is changed to I = 150. What is the new equilibrium level of income (Y)? By how much does the $50 decrease in planned investment change equilibrium income? What is the value of the tax multiplier?
Imagine this economy has a 10% tax on income.
The following are exogenous (not directly affected by income):
G = 11
I = 4
X = M = 0
The consumption function is:
C = k + cY, where k = 3, c = 0.8
Now we have to take that tax into account. Here is a way to think about it:
Look at the consumption function. It says if you give me one more dollar of income I will spend 80 cents of it (mpc = 0.8). BUT I can only spend what I receive. I can only spend my after-tax or disposable income.
With a 10% tax, I don't receive Y I receive 90% of Y or Y*(1-t) where t = 10% or 0.1.
Let's define disposable income as Yd where Yd = Y*(1-t).
Therefore we restate our consumption function as C = k + cYd
Now we have, in this case, C = k + cYd or C = 3 + 0.8Yd or C = 3 + 0.8*(Y*[1-0.1]) or C = 3 + 0.72Y.
Now what is the equilibrium GDP?
Give the answer to ONE decimal place.
The following are exogenous (not directly affected by income):
G = 11
I = 4
X = M = 0
The consumption function is:
C = k + cY, where k = 3, c = 0.8
Now we have to take that tax into account. Here is a way to think about it:
Look at the consumption function. It says if you give me one more dollar of income I will spend 80 cents of it (mpc = 0.8). BUT I can only spend what I receive. I can only spend my after-tax or disposable income.
With a 10% tax, I don't receive Y I receive 90% of Y or Y*(1-t) where t = 10% or 0.1.
Let's define disposable income as Yd where Yd = Y*(1-t).
Therefore we restate our consumption function as C = k + cYd
Now we have, in this case, C = k + cYd or C = 3 + 0.8Yd or C = 3 + 0.8*(Y*[1-0.1]) or C = 3 + 0.72Y.
Now what is the equilibrium GDP?
Chapter 13 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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Similar questions
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- Consider an economy that is characterized by the following equations: C= 400 + 0.5 Yd I = 700 - 4000i + 0.1y G= 200 T= 200 (M/P)d - = 0.75Y - 7500€ (MP)== 600 What is the equilibrium consumption (C)?arrow_forwardQ1: There are two equations for macroeconomic equilibrium in an economy. State them. Show (mathematically) that Savings equals Investment when expenditure equals income. What type of economy would you have when exports equal imports? What happens to the savings-investment relationship if exports are not equal to imports? [This can be greater than or less than]. [Hint: See video lecture on Open Economy Macroeconomics]. Note: Ensure to write out full meanings when you use abbreviations or short forms. This is key to getting full marks.arrow_forwardYou are given the following data concerning Freedonia, a new republic. 1) Consumption is 200 when income is zero and the marginal propensity to consume is 0.6 out of every dollar increase in income 2) Investment function: I = 200 3) AE ≡ C + I 4) AE = Y Questions A. Derive the savings function? B. Graph equations 3) and 4) and solve for equilibrium income (Y). C. Suppose equation 2) is changed to I = 150. What is the new equilibrium level of income (Y)? By how much does the $50 decrease in planned investment change equilibrium income? What is the value of the tax multiplier?arrow_forward
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