Equilibrium

Consider a simple macro economy with no foreign trade (you can ignore exports and imports, so total expenditure = C + I + G ).

If the consumption function can be described by the equation C = 100 + .8(Y-T), where Y is income and T is the amount of tax payments the government collects form consumers,

1) If we initially consider I, G, and T to be autonomous and I = 160, G = 100 and T = 100,

Calculate:

a) Equilibrium GDP _______

b) the government expenditure multiplier ______

c) the autonomous tax multiplier (the multiplier

d) Equilibrium GDP if the government decides to both decrease the lump sum tax by 10 (so now T=90) and decrease government expenditure by 10 (so now G=90).

2) Now consider what would happen if the government replaces the lump sum tax with a flat rate income tax (5%) such that T = .05Y

Calculate:

a) Equilibrium GDP

b) the government expenditure multiplier