Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
7th Edition
ISBN: 9780134472669
Author: Blanchard
Publisher: PEARSON
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Question
Chapter 3, Problem 5QAP
a.
To determine
To solve:
Equilibrium output.
b.
To determine
The multiplier and the extent to which the economy responds to the changes in autonomous spending, when ‘t1’ is 0 and when it is positive.
c.
To determine
The reason the fiscal policy is called as an economic stabilizer.
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Students have asked these similar questions
3) So far we have assumed that the fiscal policy variables G and T are independent of the
levels of income. In the real world, however, this is not the case. Taxes typically depend
on the level of income, and so tend to be higher when income is higher. In this problem
we examine how this automatic response of taxes can help reduce the impact of changes
in autonomous spending on output.
Consider the following behavioral equations:
C=C₁+C₂YD<
T = to +t₁Y+
Y₂ = Y-T<
G and I are both constant. Assume that t₁ is between zero and one.<
a. Solve for equilibrium output.
b. What is the multiplier? Does the economy respondmore to changes in autonomous
spending when t₁ is zero or when t₁ is positive? Explain.<
c. Why is fiscal policy in this case called an automatic stabilizer?
This problem examines the implications of allowing investment to depend on output.
Suppose the economy is characterized by the following behavioral equations:
C = c, + c,YD
Y, = Y-T
|= bo + b,Y
Government spending and taxes are constant. Note that investment increases with output. co is autonomous consumption, C, is the propensity to consume,
and bo is business confidence.
Solve for equilibrium output.
Y =
(Properly format your expression using the tools in the palette. Hover over tools to see keyboard shortcuts. E.g., a subscript can be created with
the_ character.)
K
During the 1980s, the controversial economist
Arthur Laffer promoted the idea that tax
increases lead to a reduction in government
revenue. Called supply-side economics, the
theory uses functions such as
f(x) = -
-, 30 ≤x≤ 100. This function
models the government tax revenue, f(x), in tens
of billions of dollars, in terms of the tax rate, x.
The graph of the function is shown. It illustrates
tax revenue decreasing quite dramatically as the
tax rate increases. At a tax ate of (gasp) 100%,
the government takes all our money and no one
has an incentive to work. With no income earned,
zero dollars in tax revenue is generated.
Complete parts (a) through (c) below.
110x-11,000
x-140
a. Find f(30).
f(30) = (Round to the nearest integer as needed.)
Tax Revenue
80-
40-
0-
0
50
Tax Rate
100
Chapter 3 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
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