1153 a Suppose that in the private closed economy consumptio

11:53 (a) Suppose, that in the private closed economy consumption function is C = $120 + 075Yd and investment function is I -$80. What is: o the value of autonomous spending ii) the value of spending multiplier in the value of the equilibrium output. Show the situation on the graphs in (AE-, and (aggregate investment 1-aggregate saving Saggregate) spaces. (b) Now government spending of $60 is added. Find: o) the new value of autonomous spending: ii) the new value of spending multiplier, Gin) the new value of the equilibrium output and compare with those in point (a). How is government spending financed in the absence of taxes? Show the changes on your graphs from point (a). (c) To finance its spending, govermment imposes lump-sum taxes of S60. Find: o) the new value of autonomous spending: Gi) the value of the spending multiplier, iin the new level of equilibrium output; Gin the value of the tax multiplier and compare with those in point (b). Show the changes on your graphs from point (b). What does this situation mean for the governmment budget? for the level of equilibrium output compared to those from point (a)? What is the value of the budget multiplier?

Solution

Spending on new goods and services to be used up out of a household\'s current income. Whatever is not consumed is saved. Consumption includes such things as buying food and going to a concert.

Saving
The act of not consuming all of one\'s current income. Whatever is not consumed out of spendable income is, by definition saved. Saving is an action measured over time - a flow, whereas savings are a stock, an accumulation resulting from the act of saving in the past.

Consumption Goods
Goods bought by households to use up, such as food and movies.

Investment
Spending on items such as machines and buildings, which can be used to produce goods and services in the future. It also includes changes in business inventories. The investment part of GDP is the portion that will be used in the process of producing goods in the future.

Capital Goods
Producer durables, non-consumable goods that firms use to make other goods.