2. (a) Now add the public sector as represented by gov’t spending and taxes as in columns 5 & 6 in table below. (b) Calculate the decrease in consumption due to…

2. (a) Now add the public sector as represented by gov’t spending and taxes as in columns 5 & 6 in table below.

(b) Calculate the decrease in consumption due to the lump sum tax, and use it to find the consumption after tax (ca–fill in the column 7).

(c) Use the Ca to find the aggregate expenditures (after tax) for the 4 sector private-public-open economy and fill in the column 8. Now use the column 1 and column 9 to find the new equilibrium GDP.

(d) Compare equilibrium GDP in the 4-sector with 3-sector equilibrium: Has the GDP changed? If so, by how much? Why? What is the effective multiplier from 3-sector to 4-sector? Explain.

(e) Write the budget of the federal gov’t and show whether it is in surplus or in deficit.

(f) Find levels of consumption and savings at the new higher (4-sector) equilibrium and compare them with those in a 3-sector you obtained earlier. Explain why there is no change in consumption and savings even though GDP is higher.

(g) Show the 3-sector and the 4-sector equilibrium on the same graph.

(h). calculate the effect of the followings on the GDP:

1. an increase of $50 in government expenditures?

2. a decrease of $50 in taxes?

3. an equal increase of $50 in both taxes and government spending?

4. Which fiscal policy has the least impact on the government budget? Explain!

-OVER-20 pts.

(1) (2) (3) (4) (5) (6) (7) (8)

GDP C Ig Xn G T Ca AE (4-Sector)

100 120 30 10 100 100

200 200 30 10 100 100

300 280 30 10 100 100

400 360 30 10 100 100

500 440 30 10 100 100

600 520 30 10 100 100

700 600 30 10 100 100

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