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Homework #10P
Keynesian
1) Draw the total expenditure and total production model.
2) Draw the total expenditure and total production model in a recessionary gap.
3) Draw the total expenditure and total production model in an inflationary gap.
4) The following data applies to the economy:
|
Personal Income |
Consumption |
|
$10000 |
$7000 |
|
$12000 |
$8000 |
|
$14000 |
$9000 |
The tax rate is 25%. What is the marginal propensity to consume?. What is marginal propensity to save? What is the multiplier for the economy?
5) The marginal propensity to consume is 60%. Government spending increases by $500,000. What is the numeric change in real GDP? What type of spending is this called?
6) The marginal propensity to consume is 75%. Disposable income increases by $500,000. What is the numeric change in real GDP? What type of spending is this called? What is the difference from 5)?
7) The economy is in an inflationary gap of $1,500. What is one fiscal policy the government can undertake to bring the economy to back to the natural unemployment rate? Graph using the total expenditures and total production model and explain how the policy would work. Be numerically precise, using the information in 4).
8) The economy is in a recessionary gap of $1,200. What is the other fiscal policy the government can undertake to bring the economy to back to the natural unemployment rate? Graph using the AD/AS model and explain how the policy would work. Be numerically precise, using the information in 4).
Homework #12P
Fiscal Policy
a) Draw expansionary fiscal policy that is applied when the economy is in a recessionary gap using the AD/AS model. Show how the multiplier works. What are the two fiscal actions that the government could take to implement this policy?
b) Draw contractionary fiscal policy that is applied when the economy is in an inflationary gap using the AD/ AS model? Show how the multiplier works. What are the two fiscal actions that the government could take to implement this policy?
c) Draw expansionary fiscal policy that is applied when the economy is in a recessionary gap using the TE/TP model (no numbers). What are the two fiscal actions that the government could take to implement this policy?
d) Draw contractionary fiscal policy that is applied when the economy is in an inflationary gap using the TE/TP model (no numbers). What are the two fiscal actions that the government could take to implement this policy?
e) Describe and graph how an income tax affects potential GDP and aggregate supply. Indicate the income tax wedge. (2 graphs) How do taxes on expenditures affect the income tax wedge?
f) Draw the Laffer curve. Show where the maximum tax revenues would be. From this point does an increase in tax rates increase or decrease tax revenues?
