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1. In a three-sector economy: C = 200 + 0.75Yd T = 0.2Y I = 800...

1. In a three-sector economy:
C = 200 + 0.75Yd
T = 0.2Y
I = 800
G = 1000

Calculate national income when the economy is at equilibrium. Graph your results.

(b)   Full employment is achieved when income is 5500.
What is the multiplier?
(ii)   How much should taxes be cut to achieve full employment? What is the budget at full employment?

2.In an open economy:
C = 400 + 0.75Yd
T = 0.2Y
I = 600
G = 1000
X = 500
Z = 0.1Y

Calculate national income when the economy is at equilibrium. Use the injection-leakage approach to graph your results.

Full employment is achieved when income is 5500. How much should government expenditure increase to achieve full employment?

At full employment, what is the (i) budget? (ii) trade balance?

Based on your answers in (c), is it advisable for government expenditure to increase to achieve full employment? Suggest a better option/ alternative.

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Homework Answers

Answer #1

The equilibrium level of income is

Y= C +I + G

Y= 200+0.75(Y-T) +800+1000

Y= 2000+ 0.75*0.8Y

Y= 2000+ 0.6Y

Y= 5000

The equilibrium income is below potential output which is 5500.

The multiplier measures the change in aggregate demand due to change in investment ot government spending. The value of multiplier in this case is 1/(1-0.6)= 2.5

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