Question

suppose the total government spending G=150 and tax revenue T=0.20y now if the level of national income is 2000 what is the condition of government budget​

Answer 1

Answer:

Econ 311: Intermediate Macroeconomics

Professor Christiano

Problem Set #1

Solutions

Problem #1:

C

= 160 + 0.6YD

I

= 150

G

= 150

T

= 100

(a) In equilibrium, Y = Z(Y ). So therefore

Y

= c0 + c1(Y − T) + G + I

Y

= 160 + 0.6(Y − 100) + 150 + 150

0.4Y

= 160 + 150 + 150 − 60 = 400

Y

= 1000

(b) YD = Y

− T = 1000

− 100 = 900

(c) C = 160 + 0

.6

YD = 160 + 0

.6(900) = 700

Problem #2:

(a) The equilibrium output we solved for before was Y = 100.

The total demand is C + G + I = 700 + 150 + 150 = 1000.

(b) Follow the same procedure that was used to solve Problem #1, part (a).

Y

= c0 + c1(Y − T) + G + I

Y

= 160 + 0.6(Y − 100) + 110 + 150

0.4Y

= 160 + 110 + 150 − 60 = 360

Y

= 900

Note also that this could be solved using the multiplier. The multiplier is

1

1

−MPC =

1

1−

.6 = 2

.5

. Therefore, multiply the change in government spending

(as that is going to a

ff

ect demand directly) by the multiplier to get 2.5(−40) =

−100

. Therefore,

Y

= 900.

C

= 160 + 0

.6Y

D = 160 + 0

.6(900 − 100) = 640

I = 150

G = 110

Therefore, the total demand is Z = 900. Since we are in equilibrium and

therefore Y = Z(Y ), we should expect this to be true.

Explanation: