ECO403 Assignment 2 Idea solution

A):
Let an economy is characterized by the following equations:
C = 400 + 0.8(Y-T)
G = 300
T = 250
I = 200
CALCULATE the equilibrium level of output.
Answer aY=C+I+G
Y=400+0.8(y-T)+200+300
Y=400+0.8(?-250)+200+300
Y=400+200+300=900
(0.8y=?-T)=900
Y=900={(0.8y-250)}
Solving y=?
Y=(1-0.8=0.2)=900
Y=900/0.2=4500
Deduct tax=250
(Y-T)
Y=(4500-250)
Y=4250
Use the above figure to describe the short-run effects of an increase in taxes on
national income, the interest rate, the price level, consumption and investment.
Note: describe theoretically. Diagram is NOT required


Answer bInterest rate=
Interest rate will be increase


Price level=
Price level will be increase.
Consumption=
Consumption decrease due to increase in tax no one can be saving
Investment =
Investment will increase