Question

2) Consider the income expenditure model for a closed economy with a standard linear consumption function and with the following parameters: Marginal propensity to save s = 0.2,autonomous consumption Ca = 7.2 billion €, autonomous investment Ia = 5.6 billion €,government expenditure G = 8 billion €, TR transfers = 1.6 billion €, proportional income taxt = 15%. What is the transfer change multiplier? b) What is the equilibrium pension? c) What will be the state budget surplus / deficit? d) Now assume that the government decides to increase G spending by € 2.2 billion. How and by how much will the state budget surplus change (it can also be a negative surplus, in this case a reduction in the surplus means an increase in the deficit)? e) Assume that the government must keep the budget surplus at the same level as it was-before the expenditure change, and that it will balance the budget with the tax change. how-many percentage points will the percentage tax rate have to change in order to keep the budget surplus at the same level according to point d)?

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