1. Consider the following economy: C = co+c1 (Y – T), I = ao + a1Y, I2 (1+8) I1, T = sl + G and Z = C+I2 + Ğ. Parameters ao and co are positive: ao > 0 and co > 0. Parameters a1, ci and s are between 0 and 1: a1 E (0, 1), ci € (0, 1) and s e (0, 1). In this economy, business investment (I1) depends on the level of economic activity (Y). The government wants to encourage investment so for each dollar of investment they offer a subsidy of s dollars (think of the subsidy as a negative tax: instead of taking money from you, the government gives money to you). (a) Derive an expression for the equilibrium level of output. What is the government expenditure multiplier? (b) If s = 0, what is the equilibrium level of output? What is the government expenditure multiplier? Briefly explain why the multiplier has this value. (c) Use algebra to compare the goveri.nient expenditure multipliers in parts (a) and (6). Which one is greater? Briefly explain the economic intuition behind your result

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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1. Consider the following economy:
C =
co + c1 (Y – T),
II =
= ao + a1Y,
I2
(1+s) I1,
T
=
sl + G and
Z = C+I2 + Ğ.
Parameters a and co are positive: ao > 0 and co > 0. Parameters a1,
ci and s are between 0 and 1: a1 € (0, 1), cı E (0, 1) and s e (0, 1). In
this economy, business investment (I1) depends on the level of economic
activity (Y). The government wants to encourage investment so for each
dollar of investment they offer a subsidy of s dollars (think of the subsidy
as a negative tax: instead of taking money from you, the government
gives money to you).
(a) Derive an expression for the equilibrium level of output.
What is the government expenditure multiplier?
(b) If s = 0, what is the equilibrium level of output?
What is
the government expenditure multiplier?
Briefly explain
why the multiplier has this value.
(c) Use algebra to compare the goveri.nient expenditure multipliers in
parts (a) and (6).
Which one is greater?
Briefly
explain the economic intuition behind your result
Transcribed Image Text:1. Consider the following economy: C = co + c1 (Y – T), II = = ao + a1Y, I2 (1+s) I1, T = sl + G and Z = C+I2 + Ğ. Parameters a and co are positive: ao > 0 and co > 0. Parameters a1, ci and s are between 0 and 1: a1 € (0, 1), cı E (0, 1) and s e (0, 1). In this economy, business investment (I1) depends on the level of economic activity (Y). The government wants to encourage investment so for each dollar of investment they offer a subsidy of s dollars (think of the subsidy as a negative tax: instead of taking money from you, the government gives money to you). (a) Derive an expression for the equilibrium level of output. What is the government expenditure multiplier? (b) If s = 0, what is the equilibrium level of output? What is the government expenditure multiplier? Briefly explain why the multiplier has this value. (c) Use algebra to compare the goveri.nient expenditure multipliers in parts (a) and (6). Which one is greater? Briefly explain the economic intuition behind your result
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