(a) Now add the public sector as represented by gov't spending and taxes as in columns 5 & 6 in table below.
(b) Calculate the decrease in consumption due to the lump sum tax, and use it to find the consumption after tax (ca-fill in the column 7).
(c) Use the Ca to find the aggregate expenditures (after tax) for the 4 sector private-public-open economy and fill in the column 8. Now use the column 1 and column 9 to find the new equilibrium GDP.
(d) Compare equilibrium GDP in the 4-sector with 3-sector equilibrium: Has the GDP changed? If so, by how much? Why? What is the effective multiplier from 3-sector to 4-sector? Explain.
(e) Write the budget of the federal gov't and show whether it is in surplus or in deficit.
(f) Find levels of consumption and savings at the new higher (4-sector) equilibrium and compare them with those in a 3-sector you obtained earlier. Explain why there is no change in consumption and savings even though GDP is higher.
(g) Show the 3-sector and the 4-sector equilibrium on the same graph.
(h). calculate the effect of the followings on the GDP:
1. an increase of $50 in government expenditures?
2. a decrease of $50 in taxes?
3. an equal increase of $50 in both taxes and government spending?
4. Which fiscal policy has the least impact on the government budget? Explain!