Assume we have an economy where the Price Level is constant. We can describe that economy with the following equations (below).
|C = 0.8(DI) + 2000||C = Consumption Expenditure, DI = Disposable Income|
|I = 1000||I = Investment Expenditure|
|G = 1200||G = Government Expenditure|
|X = 500||X = Expenditure on Exports|
|M = 500||M = Expenditure on Imports|
|T = 1000||T = Tax Revenue|
|DI = Y - T||Y = real GDP|
a. Using the equations above, how does the equilibrium change if G increases by 1000?
Assume that this country adopts a 10% flat income tax. The net result is that we replace the Tax equation with the following: T = 1000 + 0.1Y (where Y = real GDP). Find the new equilibrium real GDP and then answer the question below.
b. Using the new Tax equation and the remaining equations above, how does the new equilibrium change if G increases by 1000 now?