Question

In a closed economy, given the following:

The consumption function C = 0.8(1 – 0.25) Y + 12

The average tax rate t = 25%

The level of private investment I = 26

The level of government spending G = 14

Where Y is the national income.

- Calculate the equilibrium level of income and output in the economy.
- Calculate the expenditure multiplier and show the effect of

- an increase in government spending and
- an increase in private investment.

Answer #1

In a closed economy, the consumption function is:
c = 1.15 + 0.75(y - t) billions of 1992 dollars.
The tax function is:
t = 0.1y + 0.1 billions of 1992 dollars.
Planned investment is $1 billion and planned government
expenditures
are $1.5 billion. Calculate:
The equilibrium level of real GDP.
2. Consumer expenditure
3. Saving
4. The investment multiplier
5. The government budget deficit
6. The leakages from and injections into the circular flow of
income and
expenditure. Do...

In the Keynesian cross model, assume that the consumption
function is given by C=120+0.8(Y−T).
Planned investment is 200; government purchases and taxes are
both 400. Y, C, I G&T are all in billions.
1. Graph planned expenditure as a function of income.
2. What is equilibrium income?
3. If government purchases increase to 420, what is the new
equilibrium income? What is the multiplier for government
purchases?
4. What level of government purchases is needed to achieve an
income of...

The
components of planned aggregate spending in a certain economy are
given by Consumption Function: C = 800 + 0.75(Y - T) – 2000r
Planned Investment: I p = 400–3000r Government Revenue and
Spending: T = 300 and G = 450 Net Export: NX = 75 where r is the
real interest rate (For example, r = 0.01 means that the real
interest rate is 1 percent). (1) Find the level of public saving.
(2) Suppose that the real interest...

Suppose an economy is represented by the following
equations.
Consumption function C = 300 + 0.8Yd
Planned investment I = 400
Government spending G = 500
Exports EX = 200
Imports IM = 0.1Yd
Autonomous Taxes T = 500
Marginal Tax Rate t=0.25
Planned aggregate expenditure AE = C + I + G + (EX - IM)
By using the above information calculate the equilibrium level of
income for this economy and explain how multiplier changes when we
have an...

Consider a closed economy to which the Keynesian-cross analysis
applies. Consumption is given by the equation C = 200 + MPC(Y – T).
Planned investment (I) is 300, government spending (G) is 300 and
taxes (T) is 300. Assume MPC is equal to 2/3.
(a) If Y is 1,500, what is planned spending? What is inventory
accumulation or decumulation? Is equilibrium Y higher or lower than
1,500?
(b) What is equilibrium Y?
(1 mark)
(c) What are equilibrium consumption, private...

The consumption function for a closed economy with a government
sector is:
C = $2 trillion + .6Yd, where Yd =
disposable income = Y – T, and
T = lump sum taxes = $2 trillion
Additionally, planned investment, I, is $1.5 trillion and
government spending G, is
$2.5 trillion.
Find Y* (equilibrium GDP). Find C and S. Find the size of the
multiplier.
Assume the Y* you found above is below the full employment
level of Y,...

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...

On Sun Island, a closed economy, the consumption function
is
c = 1 + 0.75(y - t) billions of 1992 dollars.
The government of Sun Island levies taxes of $1 billion a year and
buys
goods and services worth $1 billion a year. Investment on Sun
Island is $0.5
billion a year.
5. If investment increases by $0.25 billion a year, what is the
change in real GDP? (3 points)
6. Go back to the initial equilibrium level of GDP....

1. Suppose the United States economy is represented by the
following equations: Z= C + I + G , C = 500 + 0.5Yd, Yd = Y − T T =
600, I = 300, G = 2000, Where, Z is demand for goods and services,
Yd is disposable income, T is taxes, I is investment and G is
government spending. Y is income/production. (a) Assume that the
economy is in equilibrium. What does it mean in terms of the...

3. The components of planned aggregate spending in a certain
economy are given by Consumption Function: C = 800 + 0.75(Y - T) –
2000r
Planned Investment: Ip = 400–3000r
Government Revenue and Spending: T = 300 and G = 450 Net Export: NX
= 75
where r is the real interest rate (For example, r = 0.01 means
that the real interest rate is 1 percent). (1) Find the level of
public saving.
(2) Suppose that the real interest...

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