The goods market of a closed economy obeys the following equation system: C = 50 + 0.9(Y −T) Z = C + I + G, with the given exogenous values
I = 100, G = 600, T = 500.
Determine the equilibrium values for output at Y = Z, for C, and for disposable income Y −T = YD. Evaluate the fiscal multiplier.
This equilibrium is unsatisfactory, as government expenditures exceed revenues and thus public saving is negative. Determine the values for G and T that are required to fulfill the condition G = T and nevertheless keep output Y at the same level. Evaluate C and YD.
Suppose the government now increases G as well as T by the same amount, say by 100. By how much does Y change if at all? The corresponding value ∆Y/∆G is called the balanced-budget multiplier.
Now re-consider the original economy in (a), i.e. without assuming G = T, but assume that taxes T depend on output T = 0.2Y. Determine the fiscal multiplier for this modified model.