## The following equations present key economic relationships within a closed economy.

Question

Y = C + I + G Equation 1

C = 20 + 0.7 (Y – T) Equation 2

T = tY Equation 3

I = 40 Equation 4

G = 35 Equation 5

T = 20 Equation 6

t = 0.2 Equation 7

Where:

Y = National Income

C = Consumption Expenditure

I = Investment Expenditure

G = Government Final Consumption Expenditure

T = income tax

t = marginal tax rate

All variables are measured in millions of euro.
a. Determine which of the above are final expenditures and which are leakages.

b. Define the „Marginal Propensity to Consume‟, the „Marginal Propensity to Save‟ and „Autonomous Consumption‟. What are the values taken by each in the equations above?

c. Use the equations above to find the equilibrium value of income (Y).

d. Explain how savings is equal to investment in the economy.

e. Discuss the implications of:

i) the tax rate (t) equal to 0;

ii) a change in investment from 40 to 50; (2) iii) a change in government expenditure from 35 to 30.