Question;Economics 576 Project II Given the basic Keynesian three-sector model Y = C + I + G i = interest rates where C = a + bYd Y = aggregate income and I = f (i ?) but I? f (Y f = is a function of with G = Go and Tx = Txo 1. Assume: C = 22.3 +.75YdNow assume that government spending is increased by $22 billion. That would (increase/decrease) the level of income by how much? 2. Assume: S = -35.1 +.25YdNow assume that taxes are cut by $15 billion. That would (increase/decrease) the level of income by how much? 3. Assume: C = 42 +.8YdNow increase taxes and government spending (simultaneously) by $33 billion. That would lead to a (decrease/increase) of __________ billion in the level of income 4. Assume: C = 20 +.7 YdNow cut taxes by $20 billion. This would have the effect of shifting the consumption function (upward/downward) by _________ billion. (Think Keynesian cross model) 5. Assume that the current level of income in the economy is $700 billion. It isdetermined that in order to reduce the unemployment rate to the desired level, it will be necessary to increase the level of aggregate income to $760 billion. Assume that S = -25 +.2Yd. How much would government spending have to be increased in order to accomplish the desired outcome? 6. Assume that the current level of income in the economy is $700 billion. It isdetermined that in order to reduce the unemployment rate to the desired level, it will be necessary to increase the level of aggregate income to $760 billion. Assume that S = -25 +.2Yd. How much would taxes have to be cut in order to accomplish the desired outcome? 7. Given a saving function of S = -25 +.2Yd, a $10 billion increase ingovernment spending will bring about how many dollars of change in consumption? 8. Now, let?s modify our model a bit. Let?s add a fourth sector of spending sothat Y = C + I + G + Xn with X = Xo and M = f (Y). Will this change, by itself, increase, decrease or not affect the magnitude of the government spending multiplier? Explain! 9. Thinking about modifications in the model again: Go back to the originalmodel again, but add a marginal propensity to invest, this is, assume that I = f (i and Y). The MPI is defined as?I/?Y and has a positive value. Will this increase, decrease or not affect the value of the government expenditures multiplier? Explain! 10. Now if we assume (more realistically) that tax collections are related to thelevel of income, that is, rather than assuming Tx = Txo, we assume that Tx = To + tY where t is the tax rate, what will that change do to the magnitude of the investment multiplier? Explain! 11. In plain English, how is it (according to Keynesian theory) that a $1 increasein government spending can increase the level of aggregate income by more than $1? (Assume that the MPC is 0.8) 12. Rather than the initial (top of first page) model, now assume a three sectoreconomy with a tax rate (assume it is both average and marginal rate) of t and a marginal propensity to invest of f. Will this new model yield larger multipliers (say, government expenditures multiplier), smaller, or the same size as the initial model? Explain!
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