Part A :

In a closed economy, given the following:

The consumption function C = 0.8(1 - 0.25) Y + 12

The average tax rate t = 25%

The level of private investment I = 26

The level of government spending G = 14

Where Y is the national income.

• Calculate the equilibrium level of income and output in the economy.
• Calculate the expenditure multiplier and show the effect of

1. an increase in government spending and
2. an increase in private investment.