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 In a small, closed economy investment is $413 billion, taxes are $276 billion, income is $1,981 billion and government spending is $287 billion

Economics

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1.  In a small, closed economy investment is $413 billion, taxes are $276 billion, income is $1,981 billion and government spending is $287 billion. 
   1. What is the value of consumption?
   2. What is the value of saving?
   3. What is the value of private saving?
   4. Does the government have a balanced budget, budget surplus or budget deficit? Explain.   

 

2. The economy is experiencing increased output creating a gap of $432 billion. The marginal propensity to save is 48 percent. To receive full credit: show your work rounding your answers to 2 decimal points and make sure to explain your answers when requested.
   1. What is the value of the spending multiplier?
   2. How much must government spending change to solve the problem?
   3. Explain if government spending should increase or decrease?

 

3. The economy is experiencing cyclical unemployment creating a gap of $789 million. The marginal propensity to consume is 86 percent. To receive full credit: show your work rounding your answers to 2 decimal points and make sure to explain your answers when requested.
   1. What is the value of the tax multiplier?   
   2. How much must the government change taxes to solve the problem?
   3. Explain if government should increase or decrease taxes?

 

4. Answer the following questions.
   1. Draw the aggregate demand / aggregate supply model in long run equilibrium, correctly labeling all parts of the model (both axes, all curves, and the equilibrium point).
   2. Assume firms and consumers become optimistic about the future. Show this on your model, labelling all new parts.
   3. Explain what happened to GDP, price level, and the unemployment rate.
   4. Where is the economy relative to the production possibilities curve and the business cycle?
   5. You are a Classical economist. Briefly explain how this problem will be resolved. 
   6. Show the solution on your model, labelling all new parts.