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Consumption and lags. Consider a closed-economy aggregate expenditure model where the current period's consumption depends on the disposable income earned in the previous period; that is, we have the following representation of the economy as: C₂ = co + C₁YD.t-1 YD,t = Yt - Tt 1₂ = Ī, Z₂ = C₂ + 1₂ + G₂.

Consumption and lags. Consider a closed-economy aggregate expenditure model where the current period's consumption depends on the disposable income earned in the previous period; that is, we have the following representation of the economy as: C₂ = co + C₁YD.t-1 YD,t = Yt - Tt 1₂ = Ī, Z₂ = C₂ + 1₂ + G₂.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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a and b please

Consumption and lags. Consider a closed-economy aggregate expenditure model where the current period's consumption depends on the disposable income earned in the previous period; that is, we have the following representation of the economy as: Ct = Co + C₁YD.t-1) YD.t = Y₂ - T₂, 1₂ = 1, Zt = Ct + It + Gt.
Transcribed Image Text:Consumption and lags. Consider a closed-economy aggregate expenditure model where the current period's consumption depends on the disposable income earned in the previous period; that is, we have the following representation of the economy as: Ct = Co + C₁YD.t-1) YD.t = Y₂ - T₂, 1₂ = 1, Zt = Ct + It + Gt.
Also, in equilibrium, aggregate supply equals aggregate demand, that is Yt = Zt. The parameters, co, I, and c₁, do not change over time and have the values co = 125, I= 50, C₁ = 0.8. (a) Suppose G: = T: = 125, for all t < 10. Find the steady state (where all variables are time-independent) level of output associated with these parameter values. Assume that the economy is at this steady state, for t < 10. (b) At t = 10, suppose government spending increases to G: = 140, and remains at this level forever. There is no change in taxation. Find the steady-state output associated with this new level of government spending. (c) Calculate the (equilibrium) values for Y₁, for t= 10, 11, 12, 13. Here you are being asked to calculate the path from the old equilibrium to the new equilibrium.
Transcribed Image Text:Also, in equilibrium, aggregate supply equals aggregate demand, that is Yt = Zt. The parameters, co, I, and c₁, do not change over time and have the values co = 125, I= 50, C₁ = 0.8. (a) Suppose G: = T: = 125, for all t < 10. Find the steady state (where all variables are time-independent) level of output associated with these parameter values. Assume that the economy is at this steady state, for t < 10. (b) At t = 10, suppose government spending increases to G: = 140, and remains at this level forever. There is no change in taxation. Find the steady-state output associated with this new level of government spending. (c) Calculate the (equilibrium) values for Y₁, for t= 10, 11, 12, 13. Here you are being asked to calculate the path from the old equilibrium to the new equilibrium.
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