Question

Suppose that in a closed economy with a state sector the following relations apply: Consumption function: ? = 125 + 0.75?? where ?? = ? - ? Desirable investment: ? = 30 Government spending: ? = 50 Taxes: ? = 15

A. Find the equilibrium income, the available equilibrium income and the equilibrium consumption.
B. Find and interpret investment and tax multipliers.
C. Calculate the savings function under the assumption that the economy is in equilibrium as well as the level of savings. What do you notice?

Answer 1

A) Equilibrium Income (Y) = C + I + G

Consumption function = a + MPC * Y

Y = 125 + 0.75 (Y - 15) + 30 + 50

Y = 125 + 0.75Y - 11.25 + 30 + 50

0.25Y = 216.25

Y = 865

C = 125 + 0.75 (865 - 15) = 762.5

B) Investment is the amount spent in the economy to raise production of goods. Tax Multiplier = (MPC / MPS)

where MPC = 0.75 and MPS = 0.25 because MPC + MPS = 1

Tax Multiplier = (0.75 / 0.25) = 3

C) Saving function = -a + MPS * Y = -125 + 0.25 * Y

There is consumption of 125 when income was zero which make saving = -125 when income is zero

answered by: anonymous