Question 1 Given the following data on simple closed economy: C = 10 +0.75 Y %3D I= 20 G= 40 where C is aggregate consumption, Y is national income, G is government expenditure on goods and services, and I is investment expenditure. Note: There is no taxes assumed in parts (i) to (ii). ) What is the equilibrium level of national income? Show all your workings. (ii) What is the value of aggregate consumption and the value of aggregate savings at the equilibrium level of the national income? Show all your workings. ( (ii)What would be the new level of national income if government expenditure increased by 10? Show all your workings.
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A simple closed economy with government sector is given by the following equations: C = 10 + 0.75 Y
I = 20
G = 40
where C is aggregate consumption, Y is
(a) What is the equilibrium level of national income? Show all your workings.
(b) What is the value of aggregate consumption and the value of aggregate savings at the equilibrium level of the national income? Show all your workings.
(c) What would be the new level of national income if government expenditure increased by 10? Show all your workings and explain the mechanisms through which the economy reaches a new equilibrium.
(d) If a tax rate of 1/3 of national income were introduced, what would be the new equilibrium level of national income in the economy outlined above. Show all your workings and explain the mechanisms through which the economy reaches the new equilibrium.
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