Question
Assume Zambia is a closed economy with autonomous consumption given by = and the marginal propensity to consume is = . . Investment, government spending
Assume Zambia is a closed economy with autonomous consumption given by = and the marginal propensity to consume is = . . Investment, government spending and taxes are, respectively, I = K300, G = K300, T = K200 (in million Kwacha). (a) Determine the equilibrium level of output . [2 marks] (b) Draw the goods market graph showing the economy's equilibrium. [2 marks] (c) Compute the government budget balance. Is it in surplus or deficit? [2 marks] (d) Compute the level of consumption and domestic private savings in the economy. [2 marks] (e) Show that in equilibrium injections equal withdrawals. [2 marks] (f) Show the relationship between investment and private and public saving. [3 marks] (g) Assume that full employment in the economy is achieved when = K4, 000. How much should the government spend (G) in order to achieve this level of output? [2 marks] (h) Calculate the government spending multiplier. [1 mark] (i) Suppose now that taxes are endogenous and that the tax rate is t = 0.25 so that T = 0.25Y.Compute the equilibrium level of output (assume that government spending is back to G = K300). [2 marks] (j) What is the government spending multiplier in this case? Is it bigger or smaller than that you computed in h) above? Briefly explain
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