Reference no: EM132476725

Consider a closed economy described by the following equations (all figures in millions of dollars): Y = C + I + G 

Assume current value of output Y in this economy equals $8,000.00 

Annual government expenditure equals $2,000.00

Current level of income tax is combination of flat Tax and income adjusted, based on following tax rate; 1,000 + .1(Y)

Current annualized consumer spending equals to: 450 + 0.75 (DI), were DI = Disposable income = Income - Tax

Current level of short term investment is fixed and equals to $2,000.00 

NX = 0

1. Calculate the current state of private saving, public saving and current level of investment. What do the information you calculated tell you about the current state of the economy?
2. Suppose the congress approve an infrastructure investment which raises government expenditure to 2,250. How would this increase impact your calculation in (a) above if government barrows the money verses raising tax to cover it?
3. Now suppose the business community is optimistic about the future of economy and decide to increase the level of investment by 10%, how would the change in investment impact the economy (in term of consumption, saving, taxes, etc.)? (hint; you want compare the result you get in (c) with what you calculated in (a)).
4. Now suppose we actually have no idea of the current value of output Y, but the rest of information on C, I, G and income tax are as stated above. What will be the necessary level of output Y should be to insure equilibrium?