Consider a closed economy where the goods market is described by the following equations: Y=C+I+G C...

 

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Consider a closed economy where the goods market is described by the following equations: Y=C+I+G C = co + C₁(YT) T = to +t₁Y with co, to > 0, 0 < c₁, t₁ < 1 and 0 < c₁ (1-t₁) +t₁ < 1. Without exception, the government pursues a balanced budget policy, i. e., G = T. (a) Which fiscal policy measures are available to the government in the economy considered here? (b) Determine the ratio of the change of the equilibrium level of output AY to the change in government spending AG, if to changes by Ato. Then show for Ato >0 that AY = AG = AT > 0 holds. What economic policy conclusions do you draw from this result? In addition, explain - using economic arguments - why the equilibrium level of output Y changes even though (net) taxes T change to the same extent as government spending G. Consider a closed economy where the goods market is described by the following equations: Y=C+I+G C = co + C₁(YT) T = to +t₁Y with co, to > 0, 0 < c₁, t₁ < 1 and 0 < c₁ (1-t₁) +t₁ < 1. Without exception, the government pursues a balanced budget policy, i. e., G = T. (a) Which fiscal policy measures are available to the government in the economy considered here? (b) Determine the ratio of the change of the equilibrium level of output AY to the change in government spending AG, if to changes by Ato. Then show for Ato >0 that AY = AG = AT > 0 holds. What economic policy conclusions do you draw from this result? In addition, explain - using economic arguments - why the equilibrium level of output Y changes even though (net) taxes T change to the same extent as government spending G.

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a The fiscal policy measures available to the government in this economy are related to government spending G and taxes T The government can use expan... View the full answer