Suppose we consider a closed economy that can be described by the following relations (all

notation as in the textbook and all figures in NOK billion):

(1) Y=Z

(equilibrium condition)

(2) Z=C+I+G

(total demand)

(3) C 0.50 (Y-T) + 2000

(consumption function)

(4) I 20000 - 15000r

(investment function)

(5) T=0.25

(tax function)

Furthermore, it is known that public consumption (G) is equal to 20,000 and the real interest

rate is equal to 10 per cent (= 0.10). GDP in a normal economic situation () is equal to 68000.

b) Assume that the authorities want to stabilize the economic situation in the country throughimplement an expansive fiscal policy. They consider the following two options:

1. reduce the marginal tax by 5 percentage points.

2. increase public consumption by 1000.

Which of the two alternatives do you consider to be best suited to reach the authorities?

goal? Your answer must be substantiated with relevant calculations.

Assume further in the thesis that we consider an open economy with a flexible exchange ratethere the central bank manages according to a flexible inflation target. The economy is basically inone boom with an associated positive output gap.