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ECON 100 Tutorial 16

ECON 100 Tutorial 16. Rob Pryce www.robpryce.co.uk/teaching. 1. Question 1. Y = C + I + G C = 50 + 0.7(Y – T) T = 0.2Y I = 200 G = 200 Now it’s just a job of re-arranging to solve for Y. Finding the Equilibrium. Y = C + I + G C = 50 + 0.7(Y – T) I = 200 G = 200

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ECON 100 Tutorial 16

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  1. ECON 100Tutorial 16 Rob Pryce www.robpryce.co.uk/teaching

  2. 1

  3. Question 1 Y = C + I + G C = 50 + 0.7(Y – T) T = 0.2Y I = 200 G = 200 Now it’s just a job of re-arranging to solve for Y

  4. Finding the Equilibrium Y = C + I + G C = 50 + 0.7(Y – T) I = 200 G = 200 Y = 50 + 0.7(Y – T) + 200 + 200 Y = 450 + 0.7(Y – T) T = 0.2Y Y = 450 + 0.7(0.8Y) Y = 450 + 0.56Y 0.44Y = 450 Y = 1023 (ish)

  5. Drawing the graph – Keynesian Cross (expenditure) 450 45o 1023 (income)

  6. After Increased G Y = C + I + G C = 50 + 0.7(Y – T) I = 200 G = 200 Y = 50 + 0.7(Y – T) + 200 + 220 Y = 470 + 0.7(Y – T) T = 0.2Y Y = 470 + 0.7(0.8Y) Y = 470 + 0.56Y 0.44Y = 470 Y = 1068 (ish)

  7. Keynesian Cross after Increased G (expenditure) 470 450 45o 1068 1023 (income)

  8. Why Income Rises by More Government expenditure increased by 20 Total expenditure increased by 45 This is because of the multiplier effect If the government give me more money, I spend some of it I also save some If I buy something off you, you have more money and spend some of it This goes on until the extra amount is very small.

  9. The Value of the Multiplier MULTIPLIER = 1 / (1 – MPC) REMEMBER THIS PLEASE!! Another way of finding the multiplier is to divide the increase in output (Y) by the increase in government spending (G). So in this case, G increased by 20 and Y increased by 45. Multiplier is then 45/20 = 2.25 This is very similar to the 2.27 you will find using the formula above

  10. Increase in Tax Rate Y = C + I + G C = 50 + 0.7(Y – T) I = 200 G = 200 Y = 50 + 0.7(Y – T) + 200 + 200 Y = 450 + 0.7(Y – T) T = 0.25Y Y = 450 + 0.7(0.75Y) Y = 450 + 0.525Y 0.475Y = 450 Y = 947 (ish)

  11. Increase in Tax Rate - Graph (expenditure) 450 45o 1023 (income) 947

  12. Relationship between Multiplier, MPC and Tax Rate MPC ↑, multiplier ↑ Tax Rate ↑, multiplier ↓ MULTIPLIER = 1 / (1 – MPC)

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  14. Question 2 Y = C + I + G C = 50 + 0.7(Y – T) T = G G = 200 I = 200

  15. Finding the Equilibrium Y = C + I + G C = 50 + 0.7(Y – T) T = G G = 200 I = 200 Y = 50 + 0.7(Y-T) + 200 + 200 CI G Y = 450 + 0.7(Y – T) T = G = 200 Y = 450 + 0.7(Y – 200) Y = 450 + 0.7Y – 140 Y = 310 + 0.7Y 0.3Y = 310 Y = 1033

  16. Increase in G Y = C + I + G C = 50 + 0.7(Y – T) T = G G = 220 I = 200 Y = 50 + 0.7(Y-T) + 200 + 220 CI G Y = 470 + 0.7(Y – T) T = G = 220 Y = 470 + 0.7(Y – 220) Y = 470 + 0.7Y – 154 Y = 316 + 0.7Y 0.3Y = 316 Y = 1053

  17. Value of the Multiplier (Balanced Budget) G increased by 20 Y increased by 20 Multiplier = 20/20 = 1 The difference is that any government spending is immediately covered by taxation. Notice too that tax is not dependent on income. There is no multiplier.

  18. Any Questions? Email: r.pryce@lancaster.ac.uk Web: www.robpryce.co.uk/teaching OfficeHour: Wednesday, 9:45 – 10:45 Charles Carter C Floor or by appointment (email me)

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