How is equilibrium output in a closed economy is determined?
Closed economy, equilibrium production, multiplier? In a closed economy the following holds:- Household consumption C is given by the consumption function: C = 100 + 0,8Yd- Planned investments are I = 300 (independent of Y).- Taxes: T = 1000 (independent of Y).- Household disposable income: Y^d = Y - T, where Y is production.- Public consumption: G = 1000a) Use the simple Keynesian model of 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) Illustrate the determination of equilibrium production in a diagram. It should be possible to read off the numeric soilution to a) in the diagram.c) Suppose that the goverment increases taxes by 100, to T = 1100. What is production in the new equilibrium?d) What is the equilibrium public deficit after the tax increase?e) What is the tax multiplier?4 years agoReport Abuseby I like CheeseMember since:May 16, 2007Total points:2,320 (Level 3) Add ContactBlockBest Answer - Chosen by Askera) Y=C+I+G so plug everything in and solve Y=.8yd+100+(I=300)+(g=1000)= so 1400+.8YdYd=Y-TY=1400+.8(Y-1000)= 600+.8Y.2Y=600Y=3000Yd=2000C=.8(2000)+100=1700I= 300G=1000--------------------------------------…c)use the same process Y=2600d) Deficit T-G=1100-1000=100 that means the government is in surpluse) The same as a simple multiplier -5 a 1$ increase in taxes decreases output by 5$ holding government spending constant.
