Question: The economy of Ruthenia is given by

C = 100 + .8 * Y^d

I = 40

G=60

a) Suppose Y^d = Y – T, where T is a fixed tax.

a. What is the equilibrium level of GDP?

b. How much should the government increase spending if it wants to increase equilibrium GDP to 1500?

c. What should the government do to taxes if it wants to increase equilibrium GDP to 1500?

d. Why do your answers differ?

b) Suppose Y^d = (1-t)*Y, where t is a proportional tax equal to 0.50.

a. How much should the government increase spending if it wants to increase equilibrium GDP to 1500?

b. Why is your answer different from part (a)?