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In a closed economy the following holds:
?Household consumption C is given by the consumptionfunction:
C = 100 + 0.75Yd
?Planned investments are I = 250 (independent of Y ).
?Household disposable income: Yd = Y - T, where Y isproduction.
?Taxes depend on income according to: T = -200 + 0.5Y .
?Public consumption: G = 1000.
(a) Use the simple Keynesian model of the goods market to calculateequilibrium
production Y , i.e. the level of production compatible withplanned
expenditure in the form of consumption and investments.
(b) What is the public budget deficit?
(c) Suppose that the government increases public consumption to G =1100.
What is production in the new equilibrium?
(d) What is the public deficit after the increase of publicconsumption?
(e) What is the multiplier for an (unfinanced) increase in publicconsumption

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Mahe Alam
Mahe AlamLv10
28 Sep 2019

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Related questions

1. Assume an economy with a Household Sector and a Business Sector. Household spending is given by C= 400 + 0.9Qd. Since there is no public sector, Qd = Q. Business sector spending is given as I = 1300. Determine the level of Autonomous Spending, the Spending Multiplier, GDP (Q), Consumption Spending (C) and Household Savings.

2. Now add a Foreign Sector where Exports are X = 1000 and Imports are Im = 500 + 0.1Q. Determine the level of Autonomous Spending, the Spending Multiplier, GDP (Q), Imports, Net Exports, Consumption Spending (C) and Household Savings.

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Please explain what each equation represents in the answer.

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a) Solve for the level of equilibrium output in this economy.

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Aggregate Demand Z is defined as Z = C+I+G+(X-M) and the equilibrium condition is Y=Z.

The disposable income is YD=(Y-T).

Consumption is C=C0+c1YD and Investment is: I=I0.

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