The establishment of macroeconomics as a specific field of study occurred following the Great Depression of the 1930s. The published work of John Maynard Keynes, The General Theory of Employment, Investment and Money, laid the foundation for macroeconomics.

Consider the following Keynesian model for an economy:

where

= 250 mil + 0.84Yd

= 175 mil

= 310 mil

T = 0,26Y

Yf = 3 100 million

Equilibrium income: Y = C + I + G

Disposable income: Yd = (1 - t)Y

NOTE: A proportional income tax reduces the disposable income of households and therefore also their consumption spending which forms part of aggregate spending in the economy. The introduction of a proportional income tax thus reduces aggregate spending, ceteris paribus.

Question 2 [20]

2.1. Calculate the multiplier for the economy without income tax. (1)

2.2. Using two separate methods, calculate the equilibrium level of income without income tax. [Tip: You should obtain the same answer for both methods.] (5)

2.3. By how much does the introduction of a proportional income tax reduce aggregate spending? (7)

2.4. For an economy with a government and income tax, how much does the government collect in taxes when the economy is in equilibrium? (2)

2.5. By approximately how much should government spending be raised to achieve full employment? (5)