Question

In A country the consumption function is: C (Y) = 5 + 0.75 Y
The investments are I = 4;
full employment income is YV = 40.

a) How high must government expenditure be for full employment to be achieved?
b) How high would government transfers to A-land citizens have to be to achieve the same goal? (Note: a transfer is like a negative tax, -T)
c) Why is it that the state expenditure is higher for b) than for a)?

The economy of B-Land is described by the following system of equations:
i) C (Y) = 200 + 0.8 YN (consumption function)
(ii) YN = Y - T (disposable income)
(iii) T = 0,25 Y (taxes)
(iv) YN = C (YN) + I + G (aggregate demand).

Autonomous government expenditure (G) is G = 150;
autonomous investment (I) is I = 50.

d) Calculate the balanced income!
e) Assume an underemployment equilibrium! Under the Keynesian income-expenditure model, both increases of G and increases of I lead to increases in income. Formally derive the investment and state multiplier!
f) Assume that the equilibrium income Y is 1,000 and the full employment income YV is 1,020! Calculate the output gap. By how much must government demand G increase in order to reach the full-employment income of YV = 1,020?

(Please always write the detailed calculation path)

Answer 1

Its Mandatory to solve only first Question