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Closed economy, equilibrium production, multiplier? In a closed economy the following holds:
- Household consumption C is given by the consumption function: C = 100 + 0,8Yd
- Planned investments are I = 300 (independent of Y).
- Taxes: T = 1000 (independent of Y).
- Household disposable income: Y^d = Y - T, where Y is production.
- Public consumption: G = 1000
a) Use the simple Keynesian model of goods market to calculate equilibrium production Y, i.e. the level of production compatible with planned expenditure in the form of consumption and investments.
b) Illustrate the determination of equilibrium production in a diagram. It should be possible to read off the numeric soilution to a) in the diagram.
c) Suppose that the goverment increases taxes by 100, to T = 1100. What is production in the new equilibrium?
d) What is the equilibrium public deficit after the tax increase?
e) What is the tax multiplier?
- 4 years ago
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Y=.8yd+100+(I=300)+(g=1000)= so 1400+.8Yd
Yd=Y-T
Y=1400+.8(Y-1000)= 600+.8Y
.2Y=600
Y=3000
Yd=2000
C=.8(2000)+100=1700
I= 300
G=1000
--------------------------------------…
c)use the same process Y=2600
d) Deficit T-G=1100-1000=100 that means the government is in surplus
e) The same as a simple multiplier -5 a 1$ increase in taxes decreases output by 5$ holding government spending constant.
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What is equilibrium output?
It is the output of an economy that equates aggregate supply with aggregate demand.
What happens to resources when a pure monopoly is at the profit maximizing output?
The economy is at equilibrium as both government suffer insufficient funds
In a market economy the distribution of output will be determined primarily by?
the quantities and prices of the resources that households supply.
In a free market economy the optimal QUALITY of goods and services is determined by?
The cost of output in relation to revenue.
Assume the US economy is in short-run equilibrium with a price level of 150 and output of 6 billion The money m What is the impact of the Federal Reserve's policy on the equilibrium interest rate?
It Falls
What is equilibrium output?
It is the output of an economy that equates aggregate supply with aggregate demand.
What happens to resources when a pure monopoly is at the profit maximizing output?
The economy is at equilibrium as both government suffer insufficient funds
In a market economy the distribution of output will be determined primarily by?
the quantities and prices of the resources that households supply.
In a free market economy the optimal QUALITY of goods and services is determined by?
The cost of output in relation to revenue.
Assume the US economy is in short-run equilibrium with a price level of 150 and output of 6 billion The money m What is the impact of the Federal Reserve's policy on the equilibrium interest rate?
It Falls
What is equilibrium GDP?
In the short run, equilibrium GDP is the level of output at which output and aggregate expenditure are equal
If the equilibrium output is below potential output?
This is known as the recessionary gap
What happens to the equilibrium wage and quantity of labor if output rises?
The equilibrium wage falls and the equilibrium quantity of labor rises
Suppose that the government reduces taxes on imported consumer goods. Use the model of aggregate demand and aggregate supply to explain what would happen to the price level and the output level of the economy in the short run?
The model of aggregate demand and aggregate supply can be used to explain what would happen to the price level and output level of the economy in the short run if the government reduces taxes on imported consumer goods. This can be illustrated with a diagram. In the diagram, the aggregate demand (AD) curve is downward sloping and the aggregate supply (AS) curve is upward sloping. The equilibrium price level is determined by the intersection of the two curves. Initially, the equilibrium price level is P1 and the equilibrium output level is Y1. When the government reduces taxes on imported consumer goods, the aggregate demand curve shifts to the right. This shift is represented by the movement from AD1 to AD2 in the diagram. The new equilibrium price level is P2, which is lower than the original price level. The new equilibrium output level is Y2, which is higher than the original output level. In summary, the reduction in taxes on imported consumer goods leads to a decrease in the price level and an increase in the output level in the short run. This is due to an increase in aggregate demand.
How do you find equilibrium price when given output and total cost?
The equilibrium price is the unit cost, which is the same as the total cost divided by the number of units produced (output).
How output and employment equilibrium is achieved through production in the classical theory?
equlibrium output and employment
What determinis the amount of output an economy produces?
haw the amount of output an economy produces can be determinis?
