The simple economy of Zentoland is represented by the following model”
Consumption function: C = 2,510 + 0.4Yd
Investment function: I = 1,000
Government spending: G = 6,000
Net taxes : T = 5,000
Export : X = 6,000
Import : M = 4,000
Disposable income : Yd = Y – T
a) What is the equilibrium level of income (Y) of Santa Land? Make sure you present all your workings. (4 marks)
b) Draw the aggregate expenditures curve and indicate the equilibrium output. (4 marks)
c) Calculate the multipliers in this economy? Please show your working clearly. (3 marks)
d) Discuss the effect of an increase in autonomous Investment of $4,000 on the equilibrium income. (4 marks)
e) If $20,000 is the “full employment” level of income, and the government’s goal is full employment, by how much must government spending (G) increase in order for the economy to reach the ‘full employment’ level of income? (3 marks)
f) Instead of increasing government spending, the government decides to lower net taxes (T) to bring the economy to the “full employment” level of income of $20,000. By how much must net taxes (T) decrease in order for the government to achieve its goal? (3 marks)
g) Explain why there are differences in the size of the change in G and change in T in parts (c) and (d) to achieve the same ‘full employment” level of income.
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