Question

Assume the following economy: Autonomous Consumption = £10,000; Marginal Propensity to Consume = 0.8; Business Investment = £30,000 A. Find the equilibrium size of income Y and the size of the Multiplier of Business Investment (hint: to find the Multiplier increase investment by 10,000) (5%) B. Assume now that a government sector is introduced, while business investment is still £30,000. Government spending injects £50,000 into the economy. However, in order to finance its expenditure the government levies an income tax at a rate of 25%. • Find the new equilibrium size of income and calculate the size of the Multiplier of Business Investment (hint: to find the Multiplier increase investment by 10,000) • Identify whether the government balance is balanced or not when I=30,000 and G=50,000 .

Answer 1