Q1. Assume that the economy is characterized by the given structural equations:
C = 160 + 0.6 (4 – T)
I = 150; G = 150; T = 100.
a) Find out the equilibrium output level.
b) If G increases to 200, then find out how equilibrium level of output? Describe the value of government expenditure multiplier?
c) If tax drops to 50, by how much will equilibrium output increase?
Find out the value of tax multiplier?
Q2. Assume that you have the given information regarding a closed economy:
C = 50 + 0.80 (Y – T)
I = 200
G = 100
a) Determine the equilibrium level of income.
b) Assume that G increases to 125 then determine the new equilibrium level of income?
c) What level of G is required to accomplish a target income of 200?