Let's study an economy where:
C = 40 + 0.8Yd
I = 200
G = 400
T = 300
a. Calculate equilibrium income. How is the equilibrium income divided among consumption, saving, investment, and government expenditures?
Does S = I? Does S + T = G + I? Why does one relation hold but not the other?
b. Suppose government policy makers decide that they will change government spending (G) to raise aggregate output by $100 billion. How much will the spending need to be changed?
c. Suppose government policy makers decide that they will change taxes (T) to raise aggregate output by $100 billion. How much will the taxes need to be changed?