# Show that the value of GDP at the point of spending balance is \$ 6,000 billion. Compared with the on page 178 with exogenous net exports, is the multiplier larger or smaller?

Question 1.

Suppose that the model of the economy is given by

Y=C + I + G + X
C= a+ bYd
Yd=(1 t) Y
X=g-mY,
Where I= \$900 billion, G=1,200 billion, and the constants take the following values: a =
220, b= 0.9, t= 0.3, g =500, and m =0.1.
a. Show that the value of GDP at the point of spending balance is \$ 6,000 billion.
Compared with the on page 178 with exogenous net exports, is the multiplier larger or
smaller?

2. Consider a closed economy model given by the following equations:

Y=C + I + G
C= 160 + 0.8Yd
Yd=(1 t) Y Z
Investment and government spending are exogenous and each equals 200. The
tax system has two components: a lump-sum tax denoted by Z and an income tax
of rate t.
a. Assume Z equals 200 and t is 0.25. Find the level of income that

satisfies spending balance. How much does the government collect in
taxes at that level of income? What is the level of government saving?

b. Suppose the lump-sum tax is reduced to 100. Find the level of income

consistent with spending balance. What is the lump-sum tax multiplier?
What are the new levels of tax collections and government saving?