On the planet Omicron Persei 9, economists estimate the following:
Output (Income) ........$2,000
Government Purchases ......$200
Net Taxes ............$200
Planned Investment Spending ....$300
Citizens consume 75% of their disposable income (marginal propensity to consume is 0.75).
a. Find consumption and planned aggregate expenditure.
b. Carefully explain why and how this economy is not in equilibrium.
c. Explain what business will do in response to this disequilibrium.
d. Explain what, in turn, will happen to income.
e. A government official suggests increasing government purchases by $100.
What is the main benefit of this proposal?
What is the main drawback of this proposal?