Question

please do the part b of the question

3. You are given the following information for Country Z C=Co + ci(1-t)Y INI G=G NX = X - my Country Z Dec 2018 Autonomous Consumption $20 trillion | Marginal Propensity to Consume 0.9 Marginal Tax Rate 0.25 Investment $200 trillion Government $200 trillion Exports $25 trillion Marginal Propensity to Import 0.07 April 2019 $20 trillion 0.9 0.25 $199 trillion $200 trillion $25 trillion 0.07 a) How much does the government of Country Z have to increase spending (G) to restore the economy to the potential output (if the equilibrium level of GDP (Y) in December 2018 is equal to the potential output)? (1 mark) Explain. (2 marks) The government would have to match the drop in investment of $itrillion, i.e. an increase G = $1 trillion. In this simple story, the size of the multiplier associated with investment and government spending are the same. b) Use the multiplier model diagram. Illustrate the impact of the decline in aggregate demand and the increase in government spending (G) that restores the economy to the potential output that existed in December 2018? (1 mark) Is this example a fantasy version of the ability of governments to stabilise fluctuations in GDP? Comment. (1 mark)

Answer 1

NX = x-my Aggregate demand (AD) - C+I+G+NX When Investment decreases by 1 trillion in 2019 and rest factors are constant Citlit GHNY, T-1 trillion +12+ 4HNX) AD ADITI ILI (AD) us tay National Income As the Investment decreases, according to equation 1 all other terms are constant, so, AD will decrease by ol=1tillion!

To balance this Government will increase the spending G to reach back to AD 1. - Citlit GANTI G+ Iz +G21 NXT A gazeltrillian CTH12 +Gi+N7, 0=1 Prillat & Aggregate Deres AD ugray National Income (4) Theears of ADI = C+1+G + NXI or Ai = c+I2+G2+ NX will be same. 80 Alt G, z 12t62 92-91 = 1, -12 | AG2 1 Trillion