ࡱ> _a^ @ ^bjbjVV 0`r<r<18t2\5)))4444444$6R94>*')>*>*4# p5...>*4.>*4..:3,T3 `q%?.,13 3505;3R9.9393d)).) )Y)))44D BD .B ECONOMICS 101, Fiscal Problem without equations Prof. Dohan Fall 2010 Last Name (Print)_______________________, First ____________Last 4 # of Soc Sec. # ________ MACRO ECONOMIC POLICY FOR UKRANRUS The current president of Ukranrus, a large emerging industrial economy, wants to have both full-employment and maintain price stability as soon as possible so that he is reelected President. The Ukranrus economy has the following characteristics (millions of Ukrans) YFE = potential output at full employment. Ya* = the equilibrium level of GDP output. It is the value of the GDP output where Ya= Yd . Yd is the demand for that output. If Ya* is less then the potential full employment output YFE, the output will goes toward Ya* which causes unemployment. If Ya* > Yfe then output stops growing at YFE and our attempt to by more than YFE causes inflation. Yd (AE in the book) = the components of final demand: Yd = C+Id+G+X-M (Id = planned investment demand which is also influenced by interest rates and the level of output), C = consumption which depends mostly on disposable income (Ydi). G = government spending on goods and services excluding transfer payments, X.= exports. M= imports. Ydi (disposable income) = Ya Tx + TR (that is output minus taxes plus transfer payments.)  A. The equilibrium output is currently Ya* = 13,000 Assume we have found this value by finding the Ya where Ya=Yd And that we know all the equation for C, and the values for I, G, T, X and M B. Full employment level of output YFE = 15,000 C. Marginal propensity to consume MPC = 0.8 Currently, its exports and imports cannot be changed because of trade agreements with its strong neighbors. Export and imports are currently fixed.   Write out the Yd function in letters taking into account that C = C -.8Ydi and remember that Ydi = (Ya Tx + Tr). Now sketch a sample of the aggregate demand function Yd. Then identify the equilibrium output Ya* and the full employment output YFE on the horizontal axis and draw vertical lines from these two points to the 45oYa line and write their numbers underneath. Yd = C+Id+G+X-M = C + .8Ya-.8*Tx + .8*Tr + I + G +X - M 2._On the graph, show the output gap between full employment level YFE = 15,000 and the equilibrium level of output which is 13,000. Use a arrow ( or ) to indicate the direction of desired change. 3. What is the horizontal "output gap (Ya* = YFE - Ya*) = +2000 (from above) (That is, the amount between YFE (Full employment output) and Ya* (current equilibrium output where Ya = Yd) and what does it mean in economic terms. This is GDP output that is permanently lost because of the lack of aggregate demand. It lowers the per capita income and the average income of households. Unemployment So now you can describe in one word the one major economic issue in this political campaign. (Observation by professor: Gee, I thought the election was about Obama, Obamacare, too much government spending, high taxes, too much government interference in the financial markets, etc., but this only an observation, and not official for this class to read or know..) 4. Calculate the regular multiplier showing work and explain the principle reason for the multiplier effect in words. (Hint: additional disposable income and consumption) M=1/(1-MPC M=1/(1-MPC) = 1/(1-.8) = 5 6. What is the vertical shift in Yd, that is what is  Aggregate demand gap between Ya and Yd at YFE. It is also called the  AE gap or aggregate expenditure gap. Explain what it measures. How did you calculate it? Show work. Hint: (Yd = (YFE - Ya*)/M Yd = (YFE - Ya*)/M => (15,000-13,000)/5 = +400 = Yd 7. VIP: What fiscal policies do we have to reach full employment with price stability (FEWPS)? That is, what variables can we use to shift Yd up or down by the required amount (from Question 6) so that the income gap between full employment and aggregate expenditure is closed. Fiscal policies refer to changes in government spending on goods and services (G), or using changes in the tax system (Tx) or transfers (Tr) to influence consumptions spending (We shall also see how changes in the taxes on business can influence investment and other behavior.) Here we are going to assume we can only change lump sum Tx or Tr, rather than changing the tax rate, tr. 8. What is the amount of the shift in Yd (or AE) (which we call Yd ) so that Yd times M, the multiplier) closes the output gap Ya*? On the graph indicate the amount and what direction they should move. 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What changes in taxes are necessary to reach FEWPS? Explain how taxes work through changing Ydi to change C which shifts Yd and this has a multipler effect on Y*a. Explain your calculations and answer. EXPLAIN HOW THIS POLICY WOULD BE IMPLEMENTED IN PRACTICE and what are the economic and political advantages and disadvantages of implementing such a tax policy? Remember that consumers save or dissave as Ydi goes up or down! 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