Y =$8000, G= $2000, T = 1000+.1Y = 1000+ .1*8000 = 1000+ 800 = 1800
I = 2000,
C = Y – I – G = 8000- 2000-2000= 4000
C = 450+.75DI => 4000-450= .75DI => DI = 4733.33
a) Private saving = Y-T -C = $8000- $1800 – $4000 = $2200
Public saving = T – G = 1800- 2000 = -200
Current level of investment is $2000 in the economy; however, public saving is negative indicating government expenditure is greater than government revenue through tax. Government has budget deficit in this current situation.
b) As G increases from $ 2000 to $2250, budget deficit increases in the short run. However, it raises total output of the economy
Y = 4000+ 2000+ 2250 = $8250
If government borrows money instead of raising tax now, it must have to tax in future to pay out the debt in future. Therefore, public debt at current year will create tax burden for future generations.
c) If investment increases by 10% ; New I = 2000(1+.10) = $2200
Y = 8000 + (2200-2000) = $8200
Tax = 1000+ .1*8200 = $1820
C = 8200 – 2200 -2000 = $4000
Private saving = Y-T -C = 8200 – 1820 – 4000 = $2400
Public saving = 1820 – 2000 = -$180
d) Y = C+ I + G in equilibrium
If the values of the components are given, the adding the values the value of Y can be obtained.
C= $4000, I = $2000 and G = $2000
Y = 4000+2000+2000 = $8000
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