PART A

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Question: PART A Given that the US economy production function (to calculate current GDP   &nbs…
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Given that the US economy
production function (to calculate current GDP

      and potential GDP) is :
GDP = Y= F(K,L,N) = 0.04K+0.03L+0.03N. The

      current GDP is produced
with K=200, L=100, and N=100, the full

      employment GDP
(potential GDP) can be potentially produced with K=225,

      L=150 , and N= 150.
Given that the average MPS (not MPC) is 0.25 (for

      problems 1, 2, and 3),
and active population is 100 millions. GDP is in

     Trillion dollars.  How much of a tax rebate per person per
year is required to

      reach the full
employment level of GDP if tax rebate is planned for a total
of

      5 years? You should
assume that the tax rebate is only for consumers and

      stimulates consumption spending only (i.e.,
no changes in investment and

      government spending is
desired).


Hint: First, find the GDP
gap, then find out how much extra consumption spending is required
to fill up this gap. Finally, how much tax rebate for the whole
population and then per person per year is needed to stimulate the
required additional consumption spending?

PART B

      To apply supply side
economics, given that only 40% of the tax credits given to
businesses are reinvested, how much tax credit do investors need to
move the economy to the full employment level?  You should assume that consumption and
government spending are not going to change.


Hint: First, find the GDP
gap, then find out how much extra investment spending is required
to fill up this gap. Finally, how much tax cut is needed for the
businesses to stimulate the required additional investment
spending, knowing that from every dollar of tax cut, businesses
will invest only 40%?


PART C

If the government wants
to impose taxes to finance government spending
to   

      reach the full employment level of GDP, how
much tax does the government

      need to
impose? Show it quantitatively
.


Hint: an application of
balancedbudget multiplier

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