Question

1. Given the following information about an economy, answer the questions that follow.

C = 600 + .6* Yd

T = 180

I =   40

G = 200

1. Determine the equilibrium value of income in this economy.
2. What is the current position of the government budget (deficit/surplus)? (Specify the amount.)
3. By how much and in what direction would G have to change if we wished to move the economy to an equilibrium of Y= 2000?
4. If Taxes were to be used instead of G, would the needed change be greater or smaller than the change in G? Briefly explain why this is true.

Answer 1

Aggregate demand = C+G+I

AD = 600+ .6*(Y - T) +200+40

AD = 600+.6*Y - .6*180 + 240

AD = 840-108 +.6*Y

AD= 732+.6*Y

At equilibrium: Y= AD

.4*Y = 732

Equilibrium Y = 1830 answer

B) as G>T, so govt spending is more than the taxes, so government deficit , = G - T = 200 - 180 = $ 20.

C)