Assume an open, mixed economy. That is, foreign trade is part of the economy, and the economy...

Question

Assume an open, mixed economy. That is, foreign trade is part of the economy, and the economy includes both a public (government) and a private (consumers and businesses) sector. Given this, aggregate demand is expressed as (C + I + G + X). Assume the MPC is .7. Assume a stimulus package of $100 billion has been approved by Congress and the money has been spent. In order to pay for those expenditures, Congress also approved a $100 billion increase in individual income taxes. Will these actions by Congress expand or contract the economy or are they just useless actions?

Robert · Accepted Answer

Solution 
Y= C+I + G+X 
Suppose, C= a + c(Y-T) 
Where a= autonomous consumption 
             MPC= c= 0.7 
             Y-T= disposable income 
In the aggregate demand equation, I is autonomous investment 
G is exogenous government expenditure 
X= net exports 
Therefore,

Assume an open, mixed economy. That is, foreign trade is part of the economy, and the economy includes both a public (government) and a private (consumers and businesses) sector. Given this, aggregate...

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