Suppose that the components of planned spending in an economy are C-500 +0.8(Y-T),I-1500, G-2000, X=0, T=0.25Y, where t is the fraction of income paid in taxés (the tax rate).As we will see in this problem, a tax system of this sort serves as an automatic stabiliser,because taxes collected automatically fall when incomes fall.a) Find a short-run equilibrium output in this economy.b) Calculate the multiplier,c) Explain how reducing the size of the multiplier helps to stabilise the economy, holdingconstant the typical size of fluctuations in the components of exogenous expenditure.

Given C = 500 + 0.8(Y - T) I = 1500 G = 2000 X = 0 T = 0.25Y

Answered: Suppose that the components of planned…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

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