i) C = 1500 + mpc (Y – tY)ii) I = 800iii) G = 500iv) X – M = 500 – mpi (Y)where:t = the (flat) tax ratempc = the marginal propensity toconsumempi = the marginal propensity toimportsuppose mpc = .80, t = .25, mpi =.2a. solve for the equilibrium outputb. Solve for the (government)spending multiplier.c. When we discussed the multiplier we discussed the impact effect. For example, suppose that G increases by 100to 600 and we assume, as we often do, that firms match the increase in demandby increasing Y by 100. In round two,this is an increase in income of 100 to consumers. Trace out exactly where this100 increase in income goes in the second round and compare to our simpler treatmentwith a closed economy and lump sum taxes. Hint, there are three leakages toaddress(again, please be very specific as to where the 100 increase income‘goes’ in this second round).d. What would happen to the multiplier if the mpi rises to .25. Please explain the intuition.
i) C = 1500 + mpc (Y – tY)
ii) I = 800
iii) G = 500
iv) X – M = 500 – mpi (Y)
where:
t = the (flat) tax rate
mpc = the marginal propensity to
consume
mpi = the marginal propensity to
import
suppose mpc = .80, t = .25, mpi =
.2
a. solve for the equilibrium output
b. Solve for the (government)
spending multiplier.
c. When we discussed the multiplier we discussed the impact effect. For example, suppose that G increases by 100
to 600 and we assume, as we often do, that firms match the increase in demand
by increasing Y by 100. In round two,
this is an increase in income of 100 to consumers. Trace out exactly where this
100 increase in income goes in the second round and compare to our simpler treatment
with a closed economy and lump sum taxes. Hint, there are three leakages to
address(again, please be very specific as to where the 100 increase income
‘goes’ in this second round).
d. What would happen to the multiplier if the mpi rises to .25. Please explain the intuition.
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