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 4000.
a) What is the MPC and MPS?
b) How much would government spending have to rise to move economy to full employment.
c) assume the government plans to finance any government spending my raising taxes to cover increase in spending. How much will government spending and taxes have to rise to move 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?