What happens to output if govt purchases are increased

Reference no: EM13186443

This question considers a closed economy Keynesian model that is augmented to include transfers payments to consumers (Tr = Transfers) that increase consumers' disposable incomes and lower government savings.

a) Suppose you had the following components of aggregate demand:

C = 400 + 0.6*YD
YD = Y - 0.25*Y + Tr
Tr = 100
I = 500
G = 600

Derive and calculate the Keynesian multiplier and algebraic level of equilibrium output. Also, what are the tax rate and the level of autonomous spending?

b) In addition to output, what are the numerical values of the following variables:

i) Consumption

ii) Private Saving

iii) Government Saving

iv) National Saving

c) What happens to output if transfers are increased by 100? Give both a numerical and intuitive answer.

d) Illustrate your answers to parts a and c graphically.

e) What happens to output if government purchases are increased by 100? Give both a numerical and intuitive answer.

f) Explain intuitively the difference between your answers to parts c and e. Do transfers or government purchases have a bigger impact on equilibrium output?

Reference no: EM13186443

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