Economics 102

Spring 2000

Homework Assignment 4 Answer Key

1.

a). Y=AE ==> Y=C+I+G=0.9*Y + 20 (since G=T=0) ===> 0.1*Y=20 ==> Y=200

b). Y=0.9*Y + 20 + 15 (G = 15) ==> 0.1*Y= 35 ==> Y=350. The government expenditure multiplier is (change in Y)/(change in G )=(350 - 200)/(15 - 0) or (1)/(1 – b) = ( 1)/( 1 - .9) =10

c). Y=0.9(Y-15) + 20 + 15 ==> 0.1Y=21.5 ==> Y=215. GDP has decreased by 135. The tax expenditure multiplier is (change in Y)/(change in T) = (215 - 350)/(15 - 0)= -9

d). The net effect is 10-9=1, not zero. This implies that the government's fiscal policy is still effective even under the balanced budget rule.

2.

Similarly to the problem 1:

a). Y=61.67

b). Y=55.

c.) Multiplier=-1.33

3.

a). Y=800

b). C=600

c). T=175

d). S=G-T+I (where T is the equilibrium level of taxes that we found in c). ).

S=100-175+100=25

4.

a). S = $1.99 trillion, r = 5.56%

b). S + T = 1.98 + 2 = $3.98 trillion. I = $1.49 trillion, so I + G = 1.49 + 2.5 =

$3.99 trillion

5.

a) L=160 million workers

b) Y= $12.65 trillion

c) 12.65/160=0.079

d) 14.14/200=0.07