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##### Econ303 Homework Assignment 5 Fall 2014

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Question;Econ303;Homework Assignment 5;Fall 2014;Due Thursday November 20;Name;Section;1. Use the Keynesian cross to;predict the impact on equilibrium GDP of the following. In each case;state the direction of the change;and give a formula for the size of the impact.;a. An increase in government;purchases.;b. An increase in taxes.;c. Equal-sized increases in both;government purchases and taxes.2. In the Keynesian cross, assume that the;consumption function is given by C = 200 + 0.75 (Y ? T);planned investment is 100, and;government purchases and taxes are both 100.;a. Graph planned expenditure as a;function of income.;b. What is the equilibrium level;of income?;c. If government purchases;increase to 125, what is the new equilibrium income?;d. What level of government;purchases is needed to achieve an increase in income of 1,600?3. In the;development of the Keynesian cross in the textbook, we assumed that taxes are a;fixed;amount. Most countries, however;levy some taxes that rise automatically with national income.;(Examples in the United States;include the income tax and the payroll tax.) Let?s represent the;tax system by writing tax revenues;as;???? =????? +????????;where????? and t are parameters of the tax code. The parameter t is the;marginal tax rate: if;income rises by $1, taxes rise by;t ? $1.;a. How does this tax system change;the way consumption responds to changes in GDP?;b. In the Keynesian cross, how;does this tax system alter the government-purchases;multiplier?;c. In the IS ? LM model, how does;this tax system alter the slope of the IS curve?4. The following equations;describe an economy.;???? =???? +????;+????.;???? = 120 + 0.5(????;?????).;???? = 100? 10????.;???? = 50.;???? = 40.;????;????;????;=????? 20????.;???? = 600.;???? = 2.;a. Identify each of the variables;and briefly explain their meaning.b. From the above list, use the relevant set;of equations to derive the IS curve. Graph the IS curve;on an appropriately labeled graph.;c. From the above list, use the;relevant set of equations to derive the LM curve. Graph the LM;curve on the same graph you used;in part (b).;d. What are the equilibrium levels;of income and interest rate?5. According to the IS-LM model, what happens in;the short run to the interest rate, income;consumption, and investment under;the following circumstances? Be sure your answer includes;an appropriate graph.;a. The central bank increases the;money supply.;b. The government increases;government purchases.c. The government increases taxes.;d. The government increases;government purchases and taxes by the same amount.

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