Question: An economy has the following values:

Autonomous consumption: 100;

marginal propensity to consume = 0.80

Investment = 200

Public expenditure = 200

Autonomous taxes = 50; tax rate = 0.25

1. Find the equilibrium level of output, and compute the corresponding level of saving, and government deficit;

2. Compute the impact on income of an increase in government expenditure = 100

3. Find by how much autonomous taxes should increase to bring government deficit back to its previous level.