Question

In: Economics

.            Consider the following model of an economy with no international trade, and in which the...

.            Consider the following model of an economy with no international trade, and in which the price level is fixed:

                                                                                 C = 70 + (11/12)∙DI

                                                                                             I = 20

                                                                                            G = 30

                                                                                Taxes = (1/11)∙GDP

where C is consumption demand, DI is disposable income, I is planned investment, G is government purchases, and all whole numbers are in billions of dollars.

a.            Determine the equilibrium level of production (GDP) in this economy (show your work), and draw this equilibrium situation on a graph.

b.            Use the multiplier to determine the change in equilibrium GDP that would result from an exogenous 11 billion dollar increase of government purchases. Then determine and explain the effects of this change on consumption, saving, and the government deficit.

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Rahul Sunny answered 7 months ago
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