Question

5. (357.) Le C+I+G 300 + Y –T) T = 1 I = 100+ -y - 2000 G = 200 i = 0.05 (2) Derive the equation for the IS curve and find the value of the multi- plier? (b) Find the equilibrium solution for aggregate output. (c) What would be the effect on output of rise in autonomous consump- tion from 300 to 320? Explain your answer. (d) Taxes are taken to be proportional to output in the above specifica- tion. Would the multiplier be higher or lower if, instead, taxes were constant (T - T)? Explain your answer.

Answer 1

y act Itu on Y - 300 + Yz (Y-5Y) +100 + Y-2000 + 200 PS Смма 300 + 100 + 200 - 2000 1 Buy Y = 600 - 20001 Y 1200 - 40001 multiptier = 1 - 7-1/2 + 1/6-116 - 12 = 2 B At equa, y = 1200- 4000 40°05 =1000 ef De = (320-800) = 20 sy 1-%+Yo-V AC x20 - 2x20 So output will inmear by 40 anib, a tal multiplier measures how much output 1 will be affected for increase or change in autonomous spending, constant then equation d If boxes were be would y = 300 + 1/2 (Y-1) + 100+% Y- 2000 9+ 200 on 11-12-Y) Y = 600 +- I -20001 then multiplier = TV - 3 then multiplier would be higher. As tax is constant for any amount of increase in income due to increase in autonomous spendina will have en effect on tax spending on constant effect of hox spending,