Problem 4

Consider an economy described by the following equations:

Y= C+I+G+X (Income identity)

C= 400+.9 Yd (Consumption)

With investment I = $300, government spending G= $100, net exports

X= $100, and the tax rate t=.5

1. What is the level of income when spending balance occurs?

What is the multiplier?

1. Suppose government spending increases to $200. What is the new level of income?

Problem 6

Consider an economy described by the following equations:

Y = C+I+G+X (income identity)

C = 300+.8 Yd (consumption)

X = 100-.04 Y (net exports)

With investment I = $200, government spending G = $200 and the tax rate t +.2

1. What is the level of income when spending balance occurs?

What is the multiplier?

1. Consider the same economy, except that investment depends positively on income, so that I =200+ .2 Y. What is the level of income and multiplier now?
2. Returning to the investment in part a, suppose that the tax rate is increased to .4. What happens to income and to the multiplier?