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Goods Market Equilibrium in the Closed Mixed Economy 2. The Role of the Government (a) Suppose, that in the private closed economy consumption function is C= $120 + 0.75Yd and investment function is I = / = $80. What is: (i) the value of autonomous spending; (ii) the value of spending multiplier; (iii) the value of the equilibrium output. Show the situation on the graphs in (AE - Y), and (LSAGG - Y) spaces. (Instruction: Draw the graphs of the large size and with the distance between the lines sufficient to show all the changes in the position and/or the slope of the lines). (b) Now government spending of $60 is added. Find: (i) the new value of autonomous spending; (ii) the new value of spending multiplier; (iii) the new value of the equilibrium output: and compare with those in point (a). How is government spending financed in the absence of taxes? Show the changes on your graphs from point (a). (c) To finance its spending, government imposes lump-sum taxes of $60. Find: (1) the new value of autonomous spending; (ii) the value of the spending multiplier; (iii) the new level of equilibrium output; (iv) the value of the tax multiplier; and compare with those in point (b). Show the changes on your graphs from point (b). What does this situation mean for the government budget? for the level of equilibrium output compared to those from point (a)? What is the value of the budget multiplier? (d) Suppose government begins to pay $20 as transfers. Find: (1) the new value of autonomous spending: (ii) the value of the spending multiplier; (iii) the new level of equilibrium output- (iv) the value of the transfer multiplier; and compare with those in point (c). What happens to government budget? How government expenditures are financed in this case? Show the changes on your graphs from point (c). (e) Suppose that in the situation, described in point (d), government instead of the lump-sum tax introduces a proportional income tax, equal to 20%. Find: the new value of autonomous spending: (1i) the new value of the spending multiplier; (iii) the new level of equilibrium output; (iv) the new value of the transfer multiplier and compare with those in point (d). Will it now be a budget surplus or budget deficit? What must be the equilibrium level of output to keep the balanced budget? Redraw the graphs from point (d) and show the changes on both graphs