The Kingdom of Elfwood (A closed Economy in the LR) has been battling to increase production of Candy but have not been able to succeed.

Their economy can be expressed as:

C = 400+0.60(Y-T)

T = Y*0.8

G =4000

I = 750-100r

Y=5000

It turns out that the King of Elfwood has a sweet tooth for Candy and has been levying back breaking taxation on its population. The King has hired you to come up with some possible ideas as to how Elfwood could increase its production in the future? However, the king does not want to reduce his consumption of Candy, not does he want to run a budget deficit.

For questions 1 to 3, Make sure you also talk of how it impacts the economies agents and aggregate values (C,I,S and Y).

Question 1

Propose to the king your plan to increase future production (even if the CE model can’t explain it). Make sure you are able to properly articulate what you want to do and how those changes will make there way in the economy

Question 2

Could policies to change household consumption pattern work? Provide 1 numerical possibility and explain how this change could be achieved. Make sure you are able to properly articulate what you want to do and how those changes will make there way in the economy.

Here I am looking for you to provide me with a possible numerical change, and to explain how you would achieve it.

Question 3

Could policies to change Investor pattern work? Provide 1 numerical possibility and explain how this change could be achieved. Make sure you are able to properly articulate what you want to do and how those changes will make there way in the economy.

Here I am looking for you to provide me with a possible numerical change, and to explain how you would achieve it.

Question 4

The King then asked you if you believe that he should reduce his consumption of Candy? Which would reduce Government expenditures and Tax revenue by the same proportion. Would this help in achieving its goal?

Provide and example where Government expenditures drop by 25%.

Sample Solution