8. (15 points). Consider the national-income model of the economy below, where I is total investment,...

 

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8. (15 points). Consider the national-income model of the economy below, where I is total investment, lo is autonomous investment, i is the interest rate, and To is tax revenue. All other variables are as before. Y=C+I+Go C = a + b(Y-To), I = lo- yi a> 0, 0 < b < 1 Y > O a. Find the effect of a change in tax revenue on the equilibrium level of national income. b. Find the effect of a change in government spending on the equilibrium level of national income. c. Find the cumulative effect of a change in tax revenue and a change in government spending on national income using your answers in a) and b). Provide an economic explanation of this result under the model's inherent assumption of a balanced government budget (all government spending is financed from taxes, there is no government borrowing (debt) in the model). Relatedly, what do your results in a) and b) predict about the effectiveness of expansionary fiscal policy? END 8. (15 points). Consider the national-income model of the economy below, where I is total investment, lo is autonomous investment, i is the interest rate, and To is tax revenue. All other variables are as before. Y=C+I+Go C = a + b(Y-To), I = lo- yi a> 0, 0 < b < 1 Y > O a. Find the effect of a change in tax revenue on the equilibrium level of national income. b. Find the effect of a change in government spending on the equilibrium level of national income. c. Find the cumulative effect of a change in tax revenue and a change in government spending on national income using your answers in a) and b). Provide an economic explanation of this result under the model's inherent assumption of a balanced government budget (all government spending is financed from taxes, there is no government borrowing (debt) in the model). Relatedly, what do your results in a) and b) predict about the effectiveness of expansionary fiscal policy? END

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USING AN ALGEBRAIC APPROACH TO THE EXPENDITUREOUTPUT MODEL Imagine an economy defined by the following C 140 09 Yd This is the consumption function wh... View the full answer