Find the new equilibrium level for income

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Reference no: EM133504472

Question: Consider an open economy with these characteristics in 2020 ($ trillions):

• Autonomous consumption = 2

• MPC = 0.8 • Planned investment = 3 • Government expenditures = 2

• Net Exports = -3 1.

During the pandemic autonomous consumption decreased to $1 trillion. Also, marginal propensity to save increased to 0.3. Find the new equilibrium level for income.

Furthermore, suppose that planned investment also declined to $2 trillion. Find the new equilibrium level for income.

Parts (3) and (4) show that economy is suffering against the pandemic. On the other hand, policy makers want to respond using fiscal policy to recover the income level in the economy. How much should government increase G to return income back to its value in part (2)?

Suppose that Republicans and Democrats agree to only a doubling of government spending, G. Policy makers, however, can affect the MPC poitively by controlling the pandemic with rapid and successful COVID-19 testing/tracing policies. What level for the MPC would result in a fully recovered equilibrium income, one that returns income to its pre-pandemic level?

Reference no: EM133504472

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