Consider a hypothetical closed economy with a government. Total government expenditure is PhP 1000. The government imposes a lump sum tax of PhP 60 and an income tax rate of 12%. The level of investment depends on interest rate i and is given by the function I = 1, 000 – 2.5i. Interest rate is equal to 2%. Household consumption is given by the function C = 1200+ 0.85Y where Y is the disposable income. d d Note: When plugging in the interest rate to the investment function, follow the convention used during the quiz (i.e., plug in 3 for 3% and not 0.03). Derive the planned expenditure equation as a function of income Y. b. Derive the equilibrium income Y What is the government expenditure multiplier in the economy? d. Suppose government expenditure increased by PhP 1000. Calculate using the multiplier approach the change in income. Verify your answer by calculating the new income by imposing the goods market equilibrium and comparing it to your answer in (b).

Consider a hypothetical closed economy with a government. Total government expenditure is PhP 1000. The government imposes a lump sum tax of PhP 60 and an income tax rate of 12%. The level of investment depends on interest rate i and is given by the function I = 1, 000 – 2.5i. Interest rate is equal to 2%. Household consumption is given by the function C = 1200+ 0.85Y where Y is the disposable income. d d Note: When plugging in the interest rate to the investment function, follow the convention used during the quiz (i.e., plug in 3 for 3% and not 0.03). Derive the planned expenditure equation as a function of income Y. b. Derive the equilibrium income Y What is the government expenditure multiplier in the economy? d. Suppose government expenditure increased by PhP 1000. Calculate using the multiplier approach the change in income. Verify your answer by calculating the new income by imposing the goods market equilibrium and comparing it to your answer in (b).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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