Can someone help me w/ my Macro Econ hw

[kaiotes]

I have this hw prob (college level):
The gov't raises taxes by $100 Billion. If the MPC is 0.6 what happens to the following? do they rise or fall? by what amounts?

a.Public savings
b.Private savings
c.National Saving
d.Investment

a. +40?
b.no change?
c+40?
d.+60?
anyone got suggestions?

 

[aphex]

Wow, this brings back memories of freshman year. Wish i remembered...

Friendly bump ^

 

[kaiotes]

ne one??

 

[fr]

Everything falls by $40 billion I think.

 

[YayYay]

Not enough info given..Is this using the aggregate expditures model? Is the multiplier effect considered? If it is...savings will decrease by 40 x the multiplier (1/mps)

which is 100 billion total decrease in savings.

 

[TheOmegaCode]

These are taxes... That tax multiplier is the Multiplier -1...

1/(1-MPC)=Multiplier...

 

[kaiotes]

<< Not enough info given..Is this using the aggregate expditures model? Is the multiplier effect considered? If it is...savings will decrease by 40 x the multiplier (1/mps)

which is 100 billion total decrease in savings. >>



which saving?
i got midterm tomorrow morning
the info i gave is word for word from text, so no multiplier effect and i'm not sure what aggregate expendituer is...

 

[b0mbrman]

 

[stash]

National saving = (private saving) + (public saving)
= [Y-T-C(Y-T)] + [T-G]
= Y-C(Y-T)-G

So,

Public saving: there is a one to one increase in public saving, so public saving increases by $100b
Private saving: The increase in taxes decreases disposable income, Y-T, by $100b. Since the MPC is 0.6, consumption falls by .6*100b = -$40billion
National saving: National saving is the sum of public saving and private saving. So a $100b increase in taxes means a $60b increase in national saving.
Investment: Y-C(Y-T)-G=I(r) This says savings national saving equals investment. So investment increases by $60 billion.
Remember that investment depends on the real interest rate. For investment to rise, the interest rate must fall. When taxes are increased, national savings rises, shifting the supply curve for loanable funds to the right. This decreases the equil real interest rate, leading to increased investment.