Question: Assume a simple Keynesian depression economy with a multiplier of 4 and an initial equilibrium income of $3,000. Saving and investment equal $400, and assume full employment income is $4,000.
a. What is the MPC equal to The MPS?
b. How much would government spending have to rise to move the economy to full employment?
c. Assume the government plans to finance any government spending by raising taxes to cover the increase in spending (it intends to run a balanced budget). How much will government spending and taxes have to rise to move the economy to full employment?
d. From the initial equilibrium, if investment grows by $100, what will be the new equilibrium level of income and savings?