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Consider a closed economy to which the Keynesian-cross analysis applies as follows: C = Consumption C 200+ 0
Consider a closed economy to which the Keynesian-cross analysis applies as follows: C = Consumption C 200+ 0.75(Y-T) T = Taxes T= 300 1 = Planned Investment 1 = 300 G = Government Spending G = 300 Part 1: If Y = 2,500, what is planned spending? Part 2: What is the value of inventory accumulation or decumulation (use "-" to indicate decumulation)? Part 3: What is equilibrium Y? Part 4: What is equilibrium consumption? Part 5: What is private saving? Part 6: What is public saving? Part 7: What is national saving? Part 8: If G is reduced to 100, how much does equilibrium income decrease (use to indicate decrease)? Part 9: What is the multiplier for government spending?
Expert Solution
1) Planned spending = C + I + G
= 200 + 0.75*(Y – 300) + 300 + 300
= 575 + 0.75Y
When Y is 2500 planned spending is 575 + 0.75*2500 = 2450
2) It is 2500-2450 = 50
3) Y – 0.75Y = 575 which gives Y = 2300 at equilibrium
4) C = 200 + 0.75*(2300 – 300) = 1700
5) Private saving = Y – T – C = 2300 – 1700 – 300 = 300
6) Public saving = T – G = 300 – 300 = 0
7) NS = PS + PVTS = 300
8) By 400 (-400)
9) multiplier = 1/(1-0.75) = 4
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