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#1
Sep 18 2013 01:34pm
Here is the question, I am struggling with it immensely

You are studying an economy with an income tax rate, t1, of 25% and a marginal propensity to save of .35. It is currently suffering from a "recessionary gap" of $500 million, which means that its equilibrium Y is less than Y FE(full employment). Make the necessary calculations from the t0 policy that it should institute.

I know that an expansionary fiscal policy is required but I am confused about the calculations to make. Please Help! Thanks!
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#2
Sep 18 2013 03:14pm
I guess we're assuming a closed economy here of Y = C + I + G?

Just a quick disclaimer, my macro kinda sucks (more of a micro/math guy)

Anyway, if we can assume a linear form of C, then

C = c_0 + .65(Y-.25Y), the second term is just marginal propensity to spend times disposable income (income minus tax)

Plug this guy into the Y equation and solve for G i guess? Unless you want to alter tax policy as well. Anyway, that's how the C part works.
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