Calculation of the components of GDP.
In a closed economy without a government sector, consumption is determined as 80% of the income available to households. Investment is autonomous at a level of £450.
a.What is the equilibrium level of income?
b.What would be the equilibrium income if investment increased by £50?
c.Calculate the value of the multiplier, given the change in investment.
d.Explain, as if you were explaining to your (non-economist) grandparents what is the meaning of that multiplier you found in c).
Now suppose that that the government levies direct taxes of 10% of income and undertakes expenditure of £250, with investment back at £450:
e. What is the equilibrium level of income?
f. Compute disposable income, consumption and aggregate demand.
g. Illustrate what is the size of the government budget deficit?
h.Calculate the value of the multiplier if investment increased by £50.
i.Compare your answers to c. and h., how and why do these two differ?