Question #6251

In a closed economy the following holds:
Household consumption C is given by the consumption function:
C = 100 + 0.75Yd
Planned investments are I = 250 (independent of Y ).
Household disposable income: Yd = Y − T, where Y is production.
Taxes depend on income according to: T = −200 + 0.5Y .
Public consumption: G = 1000.
(a) Use the simple Keynesian model of the goods market to calculate equilibrium
production Y , i.e. the level of production compatible with planned
expenditure in the form of consumption and investments.
(b) What is the public budget deficit?
(c) Suppose that the government increases public consumption to G = 1100.
What is production in the new equilibrium?
(d) What is the public deficit after the increase of public consumption?
(e) What is the multiplier for an (unfinanced) increase in public consumption.

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