Introduction to Macroeconomics

Question

1.     A simple Macro economy economic model is presented by the following information:

Consumption expenditure = 1200 + 0.9YD

Disposable Income (YD) = Y – NT

Net Taxes = 100 + 0.05Y

Investment Spending = $600 million; Government Spending = $500 million

Exports = $400 million ;  Imports = 300 + 0.1Y

a)     What is the equilibrium real GDP.                                                                

                                                                                         

b)     If the full employment is at $8000, calculate the recessionary or inflationary gap?

c)     Calculate the government expenditures multiplier.

d)     Calculate the amount of tax revenue for the government

Answer 1

Substitute Y-T in for YD and Get

C= 1200 + (9/10)Y -(9/10)*100 - (9/10)(1/20) Y = 1110 + (171/200)Y

Now Total AD = C+I+G+X-M

1110 +(171/200)Y +600 +500 +400 -300 - (1/10)Y =2310 + (151/200)Y

Set AD=Y and Get Y = 2310+(151/200)Y or 2310= (49/200) Y

or Y= (200/49)(2310)= 9428.57. The Multiplier = 200/49 =4.081

The Inflationary gap - 9428- 8000. The economy is overheating and we need to reduce demand..

The government collects $100 plus 5% of income = 100 +.05*9428.57 100 + 471.42

=571.42 or a budget surplus of 71.42