Consider the following economy for which the parameters have been estimated:
• The desired consumption C = 400 + 0.8YD;
• The gross investment I = 100;
• The taxes are T = 0.2Y;
• The government purchases G = 500;
• The imports are IM = 0.3Y;
• The exports are X = 650.
- Calculate the marginal propensity to spend. (2)
- Calculate the simple multiplier (with government & foreign trade). (2)
- Find the equilibrium national income (demand determined). (2)
- If the government has decided to increase its purchases to G = 700, other things being equal, what would be the new equilibrium national income (demand determined)? (2)
- How would you calculate the simple multiplier based on your answers to (3), (4), and the fact that the government has increased its purchases from G = 500 to G = 700? Show your work. (2)
- What happens to the budget balance when the government has increased its purchases from G = 500 to G = 700? Show your calculations and describe in words (using the terms budget surplus, budget deficit, and/or balanced budget). (2)