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Homework answers / question archive / Suppose the budget is balanced, see slides "Part C Appendix: Balance Budget Multipliers"
Suppose the budget is balanced, see slides "Part C Appendix: Balance Budget Multipliers". The economy has marginal propensity to consume of 50%, MPC = 0.5, and the marginal propensity to import is 8%, m=0.08. The price level is fixed. Show your calculations. (a) (0.2 marks) As in the notes, assume all government expenditure is autonomous, G=Go. What is the multiplier with respect to autonomous government expenditure, ? What is the change in equilibrium output when government spending increases by $10 Billion? AY (b) (0.2 marks) What is the multiplier with respect to autonomous investment, Al planned -? What is the change in equilibrium output when the economy is hit by a shock which reduces autonomous investment by $10 Billion?
2. (0.1 mark) In question 1, the price level is fixed; the change in equilibrium output is the magnitude of the horizontal shift in the AD curve. For this to be an equilibrium change, we are implicitly assuming a horizontal SRAS curve. With a budget balanced, now consider the same question but allow the price level to adjust. What can you say numerically about the government expenditure multiplier, when the SRAS is upwards sloping? That is, provide a lower and upper bound on the multiplier: ?
