Group 7_Exercise 4:

a,
 Equilibrium Output:
Y = AD = C + I + G + X – M = 45+0,75Yd+60+0,15Y+90
We have: Yd=Y - T=Y - (40+0,2Y)
⇒ Y= 45+0,75(Y-40-0,2Y)+60+0,15Y+90
 Y=45 + 0,75Y - 30 - 0,15Y + 150 + 0,15Y
 Y = 660
 Any comment on the Government budget’s status: 
T=40+0,2Y = 40+0,2*660 =172
G = 90
⇒ T > G ⇒ budget surplus
 Calculating the real unemployment rate:
Ut = Un + [(Yp – Yt)/Yp]* 50% = 5%+ [(740 -660)/740)]*50% = 10,4%

b,
 New equilibrium output:
Y2 = AD2 = C + I + G2 + X – M = 45 + 0.75Yd + 60 + 0,15Y2 + 100
We have: Yd = Y2 – T = Y2 - 40 - 0.2Y2 = 0.8Y2 - 40
⇒ Y2 = 45 + 0.75(0.8Y2 - 40) + 60 + 0.15Y2 + 100 
⇒ Y2 = 700
 Change in Taxes:
We have:
G = 90 ⇒ Y = 660 ⇒ T = 40 + 0.2Y = 40 + 0.2*660 = 172
G2 = 100 ⇒ Y2=700 ⇒ T2 = 40 + 0.2Y = 40 + 0.2*700 = 180
⇒ T increase by 8

c. How can the government using the fiscal policy:

 If Y < Yp  Changes G only:
k = 1/[1 – Cm (1 – Tm) – Im + Mm] = 1/[1-0,75(1-0,2)-0,15+0] = 4
Delta AD = Delta Y/k = (700 - 660)/4 
Delta G = Delta AD = (700 - 660)/4
Delta G = 10
 G increase by 10
 If Y > Yp  Changes T only:
k = 1/[1 – Cm (1 – Tm) – Im + Mm] = 1/[1-0,75(1-0,2)-0,15+0] = 4
Delta T = -Delta AD/Cm = (-Delta Y/k) / Cm = (-40/4)/0,75
Delta T = -40/3
 T decrease by 40/3