1. Goods Market Model with Flat Tax Suppose that Cascadia\'s economy is describe

Question

1. Goods Market Model with Flat Tax Suppose that Cascadia's economy is described by the following equations: with YD2KT C 200+.75YD 1=100 Z-C+I+G G-200 T= 100 where C is consumption, YD is disposable income, Y is output (income), T is tax, I is autonomous investment, G is government spending, and Z is aggregate spending (demand). a. Use the Y-C+I+G equilibrium condition to calculate the equilibrium value of income, disposable income and consumption Y- YD- b. Now use the alternative equilibrium condition (national saving-investment) to calculate equilibrium income. First derive the private saving function equation as a function of Y Then derive the national saving equation Sn- Solve for Y Calculate the budget surplus BS (T-G) (specify the sign)

Explanation / Answer

a) Aggregate expenditure

Z = C+I +G

Z = 200+0.75(Y-100) + 100+ 200

Z = 200 + 0.75Y -75 +300

Z = 425 +0.75Y

At equilibrium Z=Y

Y = 425+ 0.75Y

0.25Y = 425; Y* = 425/0.25;

Y= 1700, YD = 1700-100 = 1600, C = 200+0.75*1600

C = 1400.

b) Private saving

Sp = (Y-T)-C = -200 +0.25(Y –T)

Sp =-225 +0.25Y

National Savings

Sn = Sp +(T- G)

Sn = -225 + 0.25Y-100

Sn = -325 + 0.25Y

At equilibrium

-375 +0 .25Y = 100

Y* = 425/0.25 = 1700

c) Budget Surplus = (100-200) = -100

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