In: Economics
The town of Cypress Creek is preparing to go to war against the American government. To do this, it is building a giant satellite laser! To build the laser, the government of the town will resort to taxation to fund its expenditure. The initial economy of Cypress Creek can be expressed by the following agents:
Consumers, C = 25 + 0.95(Y-T)
Output, Y = 5000
Government expenditures, G = 2000
Taxation, T = 2000
Investors, I = 750-125r
Markets are fully competitive and the equilibrium condition for markets are:
Goods and service market: Y =C + I + G
Financial market: I = S
When it builds the Satellite, government and taxation change to
Government expenditures, G = 4000
Taxation, T = 4000
Hank Scorpio, the towns' founder, announces that "even by increasing government spending and
taxation, we are not worst off, as production has not changed!"
i) [2 points] check to make sure output does not change.
j) [2 points] find the consumption level in both scenario's (low and high government spending)
k)[3 points] who is paying for the burden of taxation? (how is this new spending/taxation being
distributed between investors and consumers)
l)[2 points] as the government increases its spending (G from 2000 to 4000) why won't output
change?