Calculate the simple Keynesian government purchases multiplier and the change in income.
Assume the economy of Venezuela is described by the following set of equations:
G = 1000
T = 1000
C = 500 + 0.75(Y - T )
I = 1000 - 40 r
a. Determine the IS curve and draw in a graph (Hint: r is the vertical axis variable)
b. If the equilibrium level of income is 6000, then what is the interest rate?
c. Determine the impact on income if government purchases rises by 10% and r = 6.25.
d. Compute the simple Keynesian government purchases multiplier and compute the change in income. Is there any difference with respect to the answer in part c? Why?
e. Using the original data and r = 6.25, what would happen to the level of output if taxes were increased by 10%?