Open-economy AE model with proportional taxes : Consider an AE model with trade in which AE=C +Ip +G + (EX-IM). Consider planned aggregate expenditure model with taxes proportional to income: so that total taxes paid are the tax rate multiplied by output, ty. Assume: planned investment, I = $1 trillion; government spending G = $2 trillion; the tax rate is t =0.20; the consumption function, C= $2.4 trillion + 0.80((1-t)Y); exports, EX = $2 trillion; imports, IM= 0.14Y .

 

If government spending increased to $2.5 trillion, what would be the new level of equilibrium output? What is the government spending multiplier
Holding everything else constant (and assuming government spending is $2 trillion), if planned investment increased to $1.5 trillion what would be the new equilibrium level of output?

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