Lesson 07 ConcepTest

In early 2017, the Trump administration instituted the Tax Cuts and Jobs Act (TCJA) which lowered taxes on both individuals and businesses. We will discuss this policy below.

Let’s start with assuming the US was producing at the full-employment level of output, also known as potential GDP (YP).

Draw an aggregate expenditure function, which will represent the US economy. Label the initial equilibrium as point A.

 

 

 

 

Taxes decrease as mentioned above. Assuming this was the only change in the economy (meaning GDP has not adjusted), explain below and show above how this affects your diagram in part a. Label this new point as point B.

Holding all else constant, do we see an unplanned increase, unplanned decrease, or no change to inventories?

According to your answer in part c, what do you expect to happen to the economy in the future due to this decrease in taxes? Where will the economy move towards? Show this ending spot as point C.

 

 

Fill in the following table assuming taxes = 0 and the MPC is constant:

Real GDP (Y)
Consumption (C)
Planned Investment (I)
Government Purchases (G)
Net Exports (NX) Planned Aggregate Expenditure (AE) Unplanned Change in Inventories
$9,000 $7,600 $1,200 $1,100 -$300
10,000 8,400 $1,200 $1,100 -$300
11,000 $1,200 $1,100 -$300
12,000 $1,200 $1,100 -$300
13,000 $1,200 $1,100 -$300

What is the value of the MPC?

 

What is the value of the MPS?

 

 

What is the value of equilibrium real GDP?

 

You’re given the following information regarding the economy:
C = 2550 + MPC(Y)
PI = 800
G = 1100
NX = 50
What is the level of autonomous consumption?

 

 

 

If the equilibrium level of GDP is $11,250, what is the marginal propensity to consume?

 

Based off your answer in part b, what is the multiplier in this economy?