Question 6 [5 points]
For all the questions below, select the appropriate answer:
a) The government's actual budget surplus or deficit is determined by: the level of government spending set by the government, the net tax rate set by the government, the equilibrium level of national income determined by autonomous expenditures and the multiplier, the net tax rate, the level of government expenditure, and the equilibrium level of national income.
b) Suppose the MPC and the slope of the AE function are 0.8, giving a multiplier of 5.0. Then a newly formed government introduces a net tax on national income, NT = 0.2Y. As a result: the slope of the AE function is unchanged, the multiplier remains 5.0, and equilibrium national income is not affected, the slope of the AE function decreases to 0.64, the multiplier decreases to 2.78, and equilibrium national income decreases, the slope of the AE function increases to 1.0, the multiplier and equilibrium national income both increase, the slope of the AE function decreases to 0.64, the multiplier decreases to 1.56, and equilibrium national income decreases.
Real GDP Net Taxes Consumption Investment Govt Expend Y NT C I G
0 400 600 800 1000
0 80 120 160 200
175 415 535 655 775
50 50 50 50 50
75 75 75 75 75
Based on the data in the table, the multiplier and the equilibrium GDP in the economy are: 2.5 and 750, 1.66 and 292, 4.0 and 1200, none of the above.
d) An economy with household, business, government, and international trade sectors is described by the following equations:
Consumption: C = 75 + 0.85(Y - T)
Investment: I = 125
Government expenditure: G = 75
Net taxes: NT = 0.2Y
Exports: X = 25
Imports: IM = 0.18Y
6.67, 2000 and a surplus of 325 (BB = 325), 1.5, 375 and a balanced budget (BB = 0), 3.03, 909 and a deficit of 182 (BB = -182), 2.0, 600 and a surplus of 45 (BB = 45).
e) In an open economy with imports described by the import function: IM = 0.25Y and exports equal to X = 250: in a diagram, the net export function would have a vertical intercept of 250 and a slope (IM/Y) of -0.25, the net export function would be NX = 250 + 0.25Y, if real GDP were 1600 net exports would be zero, exports would be greater than imports at all levels of GDP.
