Question attahed in image 3. Fiscal Policy and Long-term Growth3.1YC+I+G100 + 0.75YDYDY – T-20 + 0.2Y150G50Ta.) What is the level of the equilibrium income?b.) What is the value of the investment multiplier?c.) Explain how the tax function acts as an "automatic stabilizer" of the economy if there is a dropin investment level.

Answered: 3. Fiscal Policy and Long-term Growth…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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3. Fiscal Policy and Long-term Growth
3.1
Y
C+I+G
100 + 0.75YD
YD
Y – T
-20 + 0.2Y
150
G
50
T
a.) What is the level of the equilibrium income?
b.) What is the value of the investment multiplier?
c.) Explain how the tax function acts as an "automatic stabilizer" of the economy if there is a drop
in investment level.

Expert Solution

Step 1

In a closed economy, goods market equilibrium is attained when the total output (Y) produced is equal to the total output demanded by households, firms, and government or aggregate demand (AD).

AD = C+I+G

Total output is given by;

Y = C+I+G

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