The economy of Macroland has a balanced budget with fixed government expenditures G = 150 and T = 150.
Investment is autonomous: I = 200.
The consumption function is the following: C(Yd) = 250 + 0.75 (Yd).
a) Calculate the equilibrium level of income (Y). Solve for the equilibrium level of consumption.
b) Show how to obtain the equilibrium graphically.
c) The government wants to increase the equilibrium level of output and has several options:
- Increase the government expenditure by 100.
- Decrease the taxes by 100.
- Increase the government expenditure by 100 and increase the taxes by 100 at the same time (in order to keep the budget balanced).
Calculate for each possibility the multiplier and the possible new equilibrium income. Which one would you suggest to the government? Explain your answer.