Economics: Government Revenues Come From Total Income Taxes (Math Problem Sample)
The money supply is described as endogenously determined by the monetary system. Explain how this statement relates to the function of the interest rate as the main instrument of policy and level of reserves. Describe the different instruments the Central Bank has to target the Money Supply and how such instruments relate to private banks and finally with the level of Savings and Investment in the economy.
1 a). Given the multiplier, the fiscal policy should aim at using expansionary policies to move out of recession. This would be done through increasing government expenditure that will lead to a rise in income levels through wages. Considerably, the government can lower tax rates to encourage investment. These polices lead to a rise in real GDP.
Multiplier = 1/(1-MPC)
MPC = 0.6
1/ (1 – 0.6)
Therefore, a one-unit change in government expenditure would lead to a 2.5 change in national income thereby increasing the total output or real GDP.
Thus, current G = 120, increase by 2.5 will be 120 * 2.5 = 300
The new G = 300 + 120 = 420
Using the tax multiplier; - MPC/ (1- MPC)
MPC = 0.6
= - 0.6 / 0.4
= - 1.5
A cut in the tax rate by 1.5 would close the recessionary gap to attain the $850 billion potential GDP.
The Aggregate demand graph illustrates the effect of increase in government spending on the total output
Increased level of income would attract inv
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