In a closed economy, the demand for the output consists of consumption (C), Investment (I), and government spending (G), i.e., D=C+I+G. The total income of all people in the economy is equal to GDP. At the same time, consumption depends on disposable income: C=Co+a*(GDP-T) where T is tax, 0

In a closed economy, the demand for the output consists of consumption (C), Investment (I), and government spending (G), i.e., D=C+I+G. The total income of all people in the economy is equal to GDP. At the same time, consumption depends on disposable income: C=Co+a*(GDP-T) where T is tax, 0

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

In a closed economy, the demand for the output consists of consumption (C), Investment (I), and
government spending (G), i.e., D=C+I+G. The total income of all people in the economy is equal
to GDP. At the same time, consumption depends on disposable income: C=Co+a*(GDP-T)
where T is tax, 0<a<1 is a “propensity to consume" (the remaining part of the disposable income
people save for future years), and Co is a positive constant. Investment depends on both GDP and
interest rate r as I=Io+ß*GDP-y*r, where 0<BS1 and 0<ys1, and 0<a+ß+y<1
17) If B=y=0 and G=T=0, by how much will GDP change if a increases from 0.7 to 0.8, what
will be the percentage change in GDP?
18) Assume the government wants to increase its spending by $1 but wants to keep its budget
balanced, i.e., it will increase both G and T by $1. By how much (in $) will GDP change?

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