onsider the Aggregate expenditure model. Where: AD = C + I + G + NX (1) where I, G, and NX are all autonomous. C = C + c∗(Y + T R − T A) (2) where T A = tY with t ∈ [0, 1] is the proportional tax rate and c∗ ∈ (0, 1) is the marginal propensity to consume. a. Using the information above, solve for AD. Combine all the autonomous terms into one term, A. b. In an (x, y) plane, where Y is on the horizontal axis and AD is on the vertical axis, illustrate the AD curve you derived above along with the 450 line.Make sure to explain how you got the Y-intercept and solve for the slope c. Provide an economic interpretation for the slope of the AD function. d. Solve for the equilibrium level of output and show what happens to output when G increases by 1 unit. That is, what is ∆Y ? Show your result graphically and explain how the AD curves shifts and by how much. Briefly explain.
Consider the Aggregate expenditure model. Where:
AD = C + I + G + NX (1)
where I, G, and NX are all autonomous.
C = C + c∗(Y + T R − T A)
(2)
where T A = tY with t ∈ [0, 1] is the proportional tax rate and c∗ ∈ (0, 1) is the
marginal propensity to consume.
a. Using the information above, solve for AD. Combine
all the autonomous terms into one term, A.
b. In an (x, y) plane, where Y is on the horizontal axis and AD is on the
vertical axis, illustrate the AD curve you derived above along with the 450
line.Make sure to explain how you got the Y-intercept and solve for the slope
c. Provide an economic interpretation for the slope of the AD function.
d. Solve for the equilibrium level of output and show what happens to output
when G increases by 1 unit. That is, what is ∆Y ? Show your result graphically
and explain how the AD curves shifts and by how much. Briefly explain.
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