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Answer to Question #71204 in Macroeconomics for Ramintha Bitnarajah

Question #71204
Imagine an economy where all citizens have taken a vow of poverty and
consume only the minimum needed to survive C=Cmin no matter what their level
of current income or wealth is. Furthermore, this economy is completely isolated
from the rest of the world so that PCA=0. Investment and government spending
behave in the usual way.
a) Use the 45-degree diagram model to derive the IS curve for this economy.
[15]
b) What is the government expenditure multiplier for this economy? [10]
Expert's answer
a) The I - S stands for Investment and Saving and the IS curve displays the equilibrium in the goods and service market for various interest rates.
b) The government expenditure multiplier is, thus, the ratio of change in income (∆Y) to a change in government spending (∆G).

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