Question

In: Economics

In the Keynesian cross model, assume that the consumption function is given by C=$70+0.7(Y−T)C=$70+0.7(Y−T) Planned investment...

In the Keynesian cross model, assume that the consumption function is given by C=$70+0.7(Y−T)C=$70+0.7(Y−T) Planned investment is $200; government purchases and taxes are both $100.

What level of government purchases is needed to achieve an income of $1160? Assume taxes remain at $100.

What level of taxes is needed to achieve an income of $1160? Assume government purchases remain at $100.

Solutions

Expert Solution

C=$70+0.7(Y−T)

Planned investment is $200;

government purchases are 100 and taxes are both $100.

At equilibrium,

Y=C+G+ I

Y= 70+0.7(Y-100)+G+200

Y=70+0.7Y-70+G+200

0.3Y=200+G

G=0.3Y-200

When Y=$1160

G=0.3*1160-200

G=148

So, Government purchases should be $148, in order for income to be $1160.

If Government spending=100 and income=$1160

At equilibrium,

Y=C+G+ I

Y= 70+0.7(Y-T)+100+200

Y=70+0.7Y-0.7T+100+200

0.3Y=370-0.7T

When Y=$1160

0.7T=370- 0.3*1160

0.7T=22

T= 31.42

So tax should be $31.42


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