Suppose that for a particular economy and period, investment was equal to 200, government expenditure was equal to 100, net taxes were fixed at 150, and consumption (C) was given by the consumption function:
C = 20 + 0.6YD
Where YD is disposable income and Y is GDP.
a. What is the level of equilibrium income (Y)?
b. What is the marginal propensity to consume and marginal propensity to save? Write the saving function for this economy.
c. If the government expenditures for the economy are increased by 100 and this increase is financed by a 100 increase in taxes, what will be the amount of the change in the equilibrium income?