We will suppose that the economy is initially in long-run equilibrium with a level of absorption (A0) of $1,000 billion which is equal to the full-employment level of national income (Yf), and an initial level of national saving (S0) of $150 billion which is equal to investment spending (I). We will also assume that the government of this economy is initially running a balanced budget with government spending (G) and taxes (T) equal at $200 billion. In summary, in initial long-run equilibrium: Yf = A0 = $1000 b.; S0 = I = $150 b.; G0= T0 = $200 b.
The government now decides to permanently increase government spending by $10 billion (?G = $10 b) and chooses to finance this $10 billion increase in spending partly by a permanent and simultaneous $5 billion increase in taxes (?T= $5 b) and partly by additional borrowing of $5 billion. Assume that there is no change in the level of investment spending (I) in this economy.
a) Assuming that the marginal propensity to consume (MPC) equals 0.6, we can calculate that as a result of the combined, or overall, effect of these simultaneous changes in G and T the new level of domestic absorption in this economy (A1) equals $________
