Macroeconomics Answers

12. In question 8, assume that, beginning from the initial equilibrium position (investment equal to 100, government expenditure equal to 75, and net taxes fixed at 100), there was an autonomous fall in consumption and an increase in saving such that the consumption function shifted from C = 25 + 0.8YD to C = 5 + 0.8YD a. Find the change in equilibrium income resulting from this autonomous increase in saving. b. Calculate the level of saving before and after the shift in the consumption and, therefore, the saving function. How do you explain this result?

11. Suppose that, instead of a fixed level of taxes, we had an income tax so that T = t1Y where t1 was the income tax rate. Following the procedure of S ection 5 .4, derive an expression for equilibrium income Y analogous to equation (5.14) for this case in which the level of tax collections depends on income. What is the expression equivalent to the autonomous expenditure multiplier [1>(1 - b)] for this case of an income tax?

10. Suppose that government spending was increased by 10 units and that this increase was financed by a 10-unit increase in taxes. Would equilibrium income change or remain the same as a result of these two policy actions? If equilibrium income changed, in which direction would it move, and by how much? Explain.

9. Suppose that initially equilibrium income was 200 units and that this was also the fullemployment level of income. Assume that the consumption function is C = 25 + 0.8YD a nd that, from this initial equilibrium level, we now have a decline in investment of 8 units. What will be the new equilibrium level of income? What increase in government spending would be required to restore income to the initial level of 200? Alternatively, what reduction in tax collections would be sufficient to restore an income level of 200?

Suppose that for a particular economy and period, investment was equal to 200, government expenditure was equal to 100, net taxes were fixed at 150, and consumption (C) was given by the consumption function C = 20 + 0.6YD where YD is disposable income and Y is GDP. a. What is the level of equilibrium income (Y) ? b. What is the value of the government expenditure multiplier (Y>G) ? Of the tax multiplier (Y>T)? c. Suppose the investment declined by 100 units to a level of 100. What will be the new level of equilibrium income?

7. Explain carefully why the tax multiplier [ Y>T =b>(1 - b)] is negative and why it is smaller in absolute value than the government expenditure multiplier [Y>G = 1>(1 - b)].

6. In the simple Keynesian model, an increase of 1 dollar in tax will cause equilibrium income to decrease by only a fraction (b) of this 1-dollar increase. Explain the process by which this happens.

4. Explain Keynes’s theory of how expectations affect investment demand. How is this theory related to Keynes’s view that aggregate demand would be unstable in the absence of government stabilization policies?

3. Explain how the level of saving is determined in the simple Keynesian consumption function. What is the effect of an increase in disposable income on the level of saving?

1. explain how the origins of the Keynesian revolution can be found in the problem of unemployment.