1. If C = 1000 + 7/8[GDP-1000], I = 700 and G = 1000 and the economy is currently in equilibrium at 400 below full employment GDP, the correct fiscal policy would be to increase G by? (Points: 2)
2. If C = 500 + 3/4[GDP- 100], I = 300, G = 400, Xn =- 10 and full employment GDP is 210 less than current GDP, the proper action would be to increase taxes by?
Do a little research, then take a shot. What do you think?
Hint for 1): find the government spending multiplier: (1/MPS)
Hint for 2): find the taxation multiplier: (1/MPS)-1.
To find the correct fiscal policy for the given scenarios, we need to calculate the equilibrium level of GDP and compare it to the full employment level. Let's go step by step:
1. For the first question, we are given the equation C = 1000 + 7/8(GDP - 1000), where C is consumption, GDP is the level of gross domestic product, and G is government spending. We are also given that I (investment) is 700 and G is 1000.
To find the equilibrium level of GDP, we need to set the total spending (C + I + G) equal to GDP:
GDP = C + I + G
Substituting the values we have:
GDP = (1000 + 7/8(GDP - 1000)) + 700 + 1000
Simplifying the equation:
GDP = 2700 + 7/8(GDP - 1000)
Now we can solve for GDP:
Multiply through by 8 to eliminate the fraction:
8GDP = 8(2700) + 7(GDP - 1000)
8GDP = 21600 + 7GDP - 7000
Combine like terms:
GDP = 21600 + 7GDP - 7000 - 8GDP
GDP = 14600 - GDP
2GDP = 14600
GDP = 7300
So the equilibrium level of GDP is 7300.
Since the economy is currently 400 below the full employment GDP, we can calculate the full employment GDP:
Full employment GDP = Current GDP - 400
Full employment GDP = 7300 - 400
Full employment GDP = 6900
To find the fiscal policy action needed to close the GDP gap, we need to calculate the difference in government spending (G) between the equilibrium GDP and the full employment GDP:
Difference in G = Full employment GDP - Equilibrium GDP
Difference in G = 6900 - 7300
Difference in G = -400 (Negative because we want to increase G to close the gap)
Therefore, the correct fiscal policy action would be to increase government spending (G) by 400.
2. For the second question, we are given the equation C = 500 + 3/4(GDP - 100), where C is consumption, GDP is the level of gross domestic product, G is government spending, and Xn is net exports. We are also given that I (investment) is 300, G is 400, Xn (net exports) is -10, and the full employment GDP is 210 less than the current GDP.
Again, to find the equilibrium level of GDP, we need to set the total spending (C + I + G + Xn) equal to GDP:
GDP = C + I + G + Xn
Substituting the values we have:
GDP = (500 + 3/4(GDP - 100)) + 300 + 400 - 10
Simplifying the equation:
GDP = 900 + 3/4(GDP - 100)
Now we can solve for GDP:
Multiply through by 4 to eliminate the fraction:
4GDP = 4(900) + 3(GDP - 100)
4GDP = 3600 + 3GDP - 300
Combine like terms:
GDP = 3600 + 3GDP - 300 - 4GDP
GDP = 3300 - GDP
2GDP = 3300
GDP = 1650
So the equilibrium level of GDP is 1650.
Since the full employment GDP is 210 less than the current GDP, we can calculate the full employment GDP:
Full employment GDP = Current GDP - 210
Full employment GDP = 1650 - 210
Full employment GDP = 1440
To find the fiscal policy action needed to close the GDP gap, we need to calculate the difference in taxes (T) between the equilibrium GDP and the full employment GDP:
Difference in T = Full employment GDP - Equilibrium GDP
Difference in T = 1440 - 1650
Difference in T = -210 (Negative because we want to increase taxes to close the gap)
Therefore, the proper action would be to increase taxes by 210.