Prepare problems 3, 5 and 7 on pp.521 and the additional problem, Principles of Economics, Case, Fair and Oster.

Problem 3 p.521

For each of the following statements, decide wether you agree or disagree and explain your answer :

1. During period of budget surplus (when ? < ? ), the government debt grows. 2. A tax cut will increase the equilibrium level of GDP if the budget is in deﬁcit but will decrease the equilibriumm level of GDP if the budget is in surplus. 3. If the ? ? ? = 0.90, the tax multiplier is actually larger than the expenditure multiplier. Problem 5 p.521

Expert economists in the economy of Yuk estimate the following : Real output/income 1000 billion Yuks

Government purchases 200 billion Yuks

Total net taxes 200 billion Yuks

Investment spending (planned) 100 billion Yuks

Assume that Yukers consume 75 percent of their disposable incomes and save 25 percent. 1. You are asked by the business editor of the ? ????????? to predict the events of the next few months. By using the data given, make a forecast. (Assume that investment is constant.)

2. If no changes were made, at what level of GDP (? ) would the economy of Yuk settle ? 3. Some local conservatives blame Yuk’s problems on the size of the government sector. They suggest cutting government purchases by 25 billion Yuks. What effect would such cuts have on the economy ? (Be speciﬁc)

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Problem 7 p.521

Assume that in 2008, the following prevails in the Republic of Nurd : Y=200$

C=160$

S=40$

I(planned)=30$

G=0$

T=0$

Assume that households consume 80% of their income, they save 2% of their income, ? ? ? = 0.8 and ? ? ? = 0.2. That is, ? = 0.8?? and ? = 0.2?? . 1. Is the economy of Nurd in equilibrium ? What is Nurd’s equilibrium level of income ? What is likely to happen in the coming months if the government takes no action ? 2. If 200$ is the « full-employment » level of ? , what ﬁscal policy might the government follow if its goal is full employment ?

3. If the full-employment level of ? is 250$, what ﬁscal policy might the government follow ? 4. Suppose ? = 200$, ? = 160$, ? = 40$ and ? = 40$. Is Nurd’s economy in equilibrium ? 5. Starting with the situation in part (4), suppose the government starts spending 30$ each year with no taxation and continues to spend 30$ every period. If ? remains constant, what will happen to the equilibrium level of Nurd’s domestic product (? ) ? What will the new level of ? and ? be ?

6. Starting with the situation in part (4), suppose the government starts taxing the population 30$ each year without spending anything and continues to tax at that rate every period. If ? remains constant, what will happen to the equilibrium level of Nurd’s domestic product (? ) ? What will the new level of ? and ? be ?. How does your answer to this question differ from your answer to question (5) ? Why ?

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Additional problem

INCOME

2000

3000

4000

5000

6000

7000

8000

9000

10000

TABLE 1 – Add caption

TAX

C

G

I ??

200 1400 1600 1000

200 1900 1600 1000

200 2400 1600 1000

200 2900 1600 1000

200 3400 1600 1000

200 3900 1600 1000

200 4400 1600 1000

200 4900 1600 1000

200 5400 1600 1000

?

1. Fill in the disposable income (?? ) and the saving (?) columns. 2. Deﬁne « equilibrium income/output » and then ﬁnd the equilibrium income / output by two different methods.

3. Deﬁne ? ? ? and ? ? ?, and ﬁnd their numerical value. 4. How much is the :

– Government expenditure multiplier ? What is the formula ?

– Consumption multiplier ? What is the formula ?

– Investment multiplier ? What is the formula ?

– Tax multiplier ? What is the formula ?

5. From the above data :

– Derive the consumption equation

– Derive the saving equation

– Derive the investment equation

– Derive the government expenditure equation

6. What will be the new equilibrium income when the government increases its expenditure from 1600 to 3100 ?

7. What will be the new equilibrium income when the government increases the taxes from 200 to 1200 ?

8. Assume that the equilibrium level on income/output is the one found in question (2) above. If the potential income/output is 9000 and the government intends to bring the economy to the potential level :

– By how much government expenditures should increase/decrease ? Explain. – By how much taxes should increase/decrease ? Explain.

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