7.9: Exercises for Chapter 7

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EXERCISE 7.1

Suppose a government is established in a country where none previously existed. The government spends 100, financed by borrowing, to provide public services. If autonomous expenditure before government is set up is 200 and induced expenditure is 0.6Y (based on mpc=0.75 and mpm=0.15) what is the equilibrium value of real GDP before the government is established and what would equilibrium GDP be after government is established?

EXERCISE 7.2

If the government expenditure in Exercise 7.1 were financed by imposing a net tax rate on income of t=0.10:

Calculate and compare the slopes of the AE functions in Exercises 7.1 and 7.2.
Calculate and compare the multipliers in Exercises 7.1 and 7.2.
What is the equilibrium real GDP in Exercise 7.2 compared to Exercise 7.1?

EXERCISE 7.3

If government expenditure is 100 and the net tax rate is t=0.20:

Complete the following table:

Y	NT=tY	G	BB=NT–G
100
200
300
400
500
600
700