In a closed economy, the consumption function is: c = 1.15 + 0.75(y - t) billions...

In a closed economy, the consumption function is:
c = 1.15 + 0.75(y - t) billions of 1992 dollars.
The tax function is:
t = 0.1y + 0.1 billions of 1992 dollars.
Planned investment is $1 billion and planned government expenditures
are $1.5 billion. Calculate:

Explain the adjustment process to the new equilibrium. (3 points)
How does the government’s expenditures on $0.25 billion worth of
goods and services get financed? (3 points)
Show that leakages from the circular flow equal injections into it. (3
points)
Go back to the initial equilibrium expenditure. The government plans
to increase expenditures on goods and services by $0.25 billion and to
finance its expenditure by an increase in autonomous taxes. What is
the new equilibrium expenditure? (5 points)

Expert Solution

Rahul Sunny answered 2 years ago

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