Question

Consider the closed-economy Keynesian model characterized by the equations below.

? = ? +?(? −?)

? = ?0 − ?1?

? = ?0 + ?1? + ?2 ????

? = ?̅

???? stands for institutional quality, essentially telling you that the quality of the tax collection agency (Eg: Internal Revenue Service or IRS) matters for how much tax the economy is able to collect in a given year.

Let ?0 = 10,?1 = 5, ?2 = 20, ? = .9, ? = 10, ?0 = 8, ?1 = 12

Suppose institutional quality goes up by 1 unit (we don’t care about the unit of quality). Quantify by how much equilibrium income goes up by. You need to provide a specific value.

Answer 1