Question

3. In a three-sector economy: C = 200 + 0.75Yd T = 0.2Y I = 800 G = 1000

(a) Calculate national income when the economy is at equilibrium. Graph your results.

(b) Full employment is achieved when income is 5500.

(i) What is the multiplier?

(ii) How much should taxes be cut to achieve full employment? What is the budget at full employment?

Answer 1

we have C = 200 + 0,75yd and T = 0,2Y , I = 800 and G = 1000

a) economy is at Equikbruim at Y = C + I + G

Y = 200 + 0,75 ( Y - T ) + 800 + 1000

Y = 2000 + 0.75( Y - 0.2Y )

Y= 2000 + 0.75(0.8Y)

Y - 0.6Y = 2000 or Y = 2000/ 0.4

Y = 5000

CC) Multiplier = 1 / 1- MPC

we have MPC = 0.75

multiplier = 1/ 0.25 =4

d) full employment is at 5500 so we have income gap = 500

tax needed to cut = 500 /4 = 125.

125 needed to cut to achieve full employment.