Reference no: EM132655620

a) In a closed economy, consider the aggregate income is , consumption ( ) is the sum of autonomous consumption and the part of consumption that depends on the disposable income, fixed investment is , and government spending is . If the country's tax rate is , then what is the amount of private savings and public savings? From the national income identity for the above economy, show that the national savings is the sum of private savings and public savings, and is identical to the fixed investment.

Note: If you derive the identity from lump-sum taxes, you have to estimate the amount of lump-sum tax given the information above.

b) Now, for the same economy autonomous consumption is Rs. 1200, marginal propensity to consume is 0.8, tax rate is 0.2, fixed investment is Rs. 1400, and the government spending is Rs. 1000.

i) What's the level of output in good's market?

ii) Now, a credit card theft reduces the marginal propensity to consume to 0.4. What will be the new output level at good's market?

iii) Compare the savings in old and new market equilibria, where the savings is exactly the amount of national savings, you derived in part - (a).

iv) Do you think the savings are same in old and new good's market equilibria? Provide appropriate reasoning for your answer. Does the economy better off after the rise in marginal propensity to save?