ECOS2002 – Intermediate Macroeconomics
Topic: ‘Fiscal Policy and the Open Income-Expenditure Model’
Tutorial 2: Week 4 (19-23 August)
NB: The readings for this tutorial are indicated in Topic 2 of the reading guide.
1. In the Keynesian theory of output what is mechanism that brings about the equilibrium level of output determined by aggregate demand?
2. ‘The stance of fiscal policy cannot be measured by the size of the actual budget deficit.’ Why not? Can the stance of fiscal policy be measured?
3. What are automatic fiscal stabilisers and what role do they play in the economic system? What factors influence these stabilisers?
4. In an economic recession why is it that an increase in government spending is usually considered more effective than a reduction in taxes in providing fiscal stimulus to the economy? What does the balanced budget multiplier imply for the conduct of fiscal policy?
5. In assessing the effectiveness of a fiscal stimulus policy why might the composition of the increased government expenditure and/or the form of the changes in net taxation be important?
6. Suppose the following four-sector Keynesian ‘multiplier’ model:
AD = Cp + Ip + G + X - M
Cp = Co + c(Y-T)
Ip = Io
G = Go
T = To + tY
X = Xo
M = Mo + mY
where X and M are exports and imports of goods and services respectively, m is the marginal propensity to import, and all other variables have their usual meaning.
What is the equilibrium level of income, Ye, in terms of the parameters and exogenous variables of this model? Show this equilibrium diagrammatically and discuss the implications for the position and slope of the AD schedule of the inclusion of the international sector.
Derive the expenditure multipliers with respect to Go and Xo. How does the size of the government expenditure multiplier compare with that derived for the three sector model...
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