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Consider a closed economy with demand for goods as follows: ? ?? ?? = ?? + ?? + ?? ? ?? = 600 + 0.50(?? – ??) ? ?? = 1200 ? ?? = 700 ? ?? = 1000 a. What is “autonomous expenditure” for this economy? a. According to the Keynesian Cross model of income determination, what would be the short run equilibrium value of real aggregate income (Y) for this economy? b. All else equal, what is the new short run equilibrium value of income if government purchases (G) increased by 300 (from 700 to 1000)? c. What is the government spending multiplier (i.e – – ??? */??? ) for this economy? d. If government purchases are held constant at 700 and income taxes are cut by 300 (from 1000 to 700), what is the new short run equilibrium value of income? e. What is the tax multiplier (i.e – – ??? */??? ) for this economy? b. According to the Keynesian Cross model, which is more effective at raising aggregate income in the short run, tax cuts or government spending? Why 2. Consider the following model of a closed economy in which household income taxes are proportional to income: ? ?? ?? = ?? + ?? + ?? ? ?? = ?? ?? ? ?? = 400 + 0.60(?? – ??) ? ?? = 1200 ? ?? = 1000 ? ?? = 0.20? Document Preview:

Homework Assignment #3 ECO 3203, Fall 2017 thDue: Friday, December 8 at the beginning of class 1. Consider a closed economy with demand for goods as follows: ??? ??=??+??+?? ()? ??=600+0.50??-?? ? ??=1200 ? ??=700 ? ??=1000 a. What is “autonomous expenditure” for this economy? a. According to the Keynesian Cross model of income determination, what would be the short run equilibrium value of real aggregate income (Y) for this economy? b. All else equal, what is the new short run equilibrium value of income if government purchases (G) increased by 300 (from 700 to 1000)? */c. What is the government spending multiplier (i.e – – ?????? ) for this economy? d. If government purchases are held constant at 700 and income taxes are cut by 300 (from 1000 to 700), what is the new short run equilibrium value of income? */e. What is the tax multiplier (i.e – – ?????? ) for this economy? b. According to the Keynesian Cross model, which is more effective at raising aggregate income in the short run, tax cuts or government spending? Why 2. Consider the following model of a closed economy in which household income taxes are proportional to income: ??? ??=??+??+?? ??? ??=?? ? ??=400+0.60(??-??) ? ??=1200 ? ??=1000 ? ??=0.20?? a. What is “autonomous expenditure” for this economy? Hint: by definition, it will not depend on the value of real aggregate income (Y). b. What is the short run equilibrium value of real aggregate income (Y) for this economy? c. All else equal, what would the new short run equilibrium value of income be, if government purchases were to increase from 1000 to 1500? d. What is the basic expenditure multiplier for this economy? Hint: it is NOT equal to 1/(1-0.60).e. Suppose that the government is required by law to keep its budget balanced, so that government purchases must always equal income tax revenue (G = T = 0.20Y). What is the basic expenditure multiplier in that case? f. Would a balanced…

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