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

C = 50 + 0.80Yd; C = consumption function; Yd = disposable
income (Y-T)
T = 30; T = Tax revenue I = 100;
I = Investment G = 150;
G = Government expenditure
Yf = Full Employment RGDP (Potential RGDP) = 1600
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