HOMEWORK PROBLEMS 9, 10, 12, 13 page 185

REAL DOMESTIC OUT PUT = DI AE, PRIVATE CLOSED ECONOMY EXPORTS IMPORTS Chapter 9 #9 page 185 REAL DOMESTIC OUT PUT = DI AE, PRIVATE CLOSED ECONOMY EXPORTS IMPORTS NET EXPORTS AE, PRIVATE OPEN ECONOMY $200 $240 $20 $30 250 280 20 30 300 320 350 360 400 450 440 500 480 550 520 Chapter 9 #9 page 185

A. Graph the consumption schedule and determine the MPC. Chapter 9 #10 page 185 GDP C $100 $120 200 300 280 400 360 500 440 600 520 700 700 600 500 400 300 200 100 AE C 45◦ C 100 200 300 400 500 600 700 GDP = DI A. Graph the consumption schedule and determine the MPC.

Consumption is reduced by the MPC of the tax B. Assume that a lump-sum tax is imposed such that the government collects $10 billion in taxes at all levels of GDP. Graph the resulting consumption schedule, and compare the MPC and the multiplier with those of the pretax consumption schedule. Consumption is reduced by the MPC of the tax Chapter 9 #10 page 185 Consumption after Tax $112 $192 $272 $352 $432 $512 $592 GDP C TAX $100 $120 $10 200 10 300 280 400 360 500 440 600 520 700 Equilibrium GDP is reduced by $40. Consumption is reduced by $8 and the multiplier is 5. The new equilibrium GDP is $160. Equilibrium GDP is reduced by $40. Consumption is reduced by $8 and the multiplier is 5. The new equilibrium GDP is $160.

ANSWER: GDP increases by the amount of the change in spending ($20). Chapter 9 #12 page 185 REAL DOM REAL DOM. OUTPUT =DI AE, PRIVATE CLOSED ECONOMY EXPORTS IMPORTS NET EXPORTS GOV’T EXPEND. TAXES AE, OPEN ECONOMY 200 240 $20 $30 $-10 250 280 20 30 -10 290 300 320 330 350 360 370 400 410 450 440 430 500 480 490 550 520 530 What is the result if the government plans to tax and spend $20 at each level of GDP? ANSWER: GDP increases by the amount of the change in spending ($20). The increase in taxes reduces consumption by the MPC of the tax. (20 X MPC (.8) = 16). 16 x 5 (the multiplier) = 80. Equilibrium GDP is reduced by $80. The net result in the increase in taxes and the equal increase in spending is and increase in Equilibrium GDP by the amount of the change in spending ($20). The increase in government spending of $20 increases Equilibrium GDP by $100. $20 X 5 (the multiplier) = 100. The net result in the increase in taxes and the equal increase in spending is and increase in Equilibrium GDP by the amount of the change in spending ($20).

What will be the consequence of this gap? Chapter 9 #13 page 185 If full employment in this economy is 130 million, will there be an inflationary expenditure gap or a recessionary expenditure gap? POSSIBLE LEVELS OF EMPLOYMENT, MILLIONS REAL DOMESTIC OUTPUT AE 90 $500 $520 100 550 560 110 600 120 650 640 130 700 680 RECESSIONARY What will be the consequence of this gap? Employment will be 20 million less than at full employment. By how much would AE in column 3 have to change at each level of GDP to eliminate the inflationary expenditure gap or the recessionary AE gap? Explain $20 What is the multiplier in this example? 5 Will there be an inflationary expenditure gap or a recessionary expenditure gap if the full-employment level of output is $500 billion? INFLATIONARY Employment will be 20 million less than at full employment. Explain the consequences. DEMAND-PULL INFLATION (higher prices, no increase in output) By how much would AE in column 3 have to change at each level of GDP to eliminate the gap? $20 What is the multiplier? 5