Answer to Question #20316 in Macroeconomics for Dimitri

Question #20316
Suppose you are given the following fixed-price Keynesian model: C = 480 + 0.9Yd I = 200 G = 100 X = 200 M = 100 + 0.1Yd T = 100 a. Find the aggregate expenditure function. b. Find the equilibrium level of real GDP. c. What is the spending multiplier in this model? Tax multiplier? d. Show that leakages = injections at equilibrium. e. If taxes increase by $100, what is the new equilibrium level of GDP?
Expert's answer
a.& Aggregate expenditure function = C + I + G + X - M = 480 + 0.9Yd +200 +100 + 200 -100 - 0.1Yd = 880 + 0.8Yd
b.& Equilibrium level of real GDP = Y = 480 + 0.9(Y - 100) + 200 +100 + 200 -100 - 0.1(Y - 100) = 2,000
c.& Spending multiplier = 1/(1-MPC) = 1/(1 - 0,5) = 2
Tax multiplier = - MPC/(1-MPC) = -0,5/(1-0,5) = -1
d.& Show that leakages = injections at equilibrium.&
& Injections are increases in spending = additions to the flow of income.
Govt spending (G) and Investment are injections.
Leakages are reductions to the flow.
Taxes (T ) and Saving (S) are leakages from the flow of income.
e.& If taxes increase by $100, what is the new equilibrium level of GDP?
Y = 480 + 0.9(Y - 200) + 200 +100 + 200 -100 - 0.1(Y - 200) = 3,600

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