Suppose an economy is described by the following relationships: C = a + b(Y-T). Consumption, C,...

Suppose an economy is described by the following relationships:

C = a + b(Y-T).

Consumption, C, is a function of disposable (i.e., after-tax) income, (Y -T). The terms a and b are parameters.

I = c – dR where I is the investment and R is the rate of interest. The terms c and d are parameters.

NX = m - ne where I is the net exports and e is the real exchange rate. The terms m and n are parameters.

We assume that Y and R are fixed. Use the national income identity, Y = C + I + G + NX to show:

A) What happens when taxes (T) fall and when government expenditure (G) rises.

B) What happens to National Saving and Consumption? Draw a diagram to show your work.

**show work please

Expert Solution

Rahul Sunny answered 2 years ago

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