The following equations describe an economy. (Think of C , I , G , etc., as being measured in Billions and I as a percentage; a 5 percent interest rate implies I = 5.) C= 0.8(1 - t )Y T=0.25 I=900-50i -G=800 L = 0.25Y-62.5i -M/-P= 500 a. What is the value of aG which corresponds to the simple multiplier (with taxes) ? b. By how much does an increase in government spending of ∆G increase the level of Income in this model, which includes the money market? c. By how much does a change in government spending of ∆G affect the equilibrium Interest rate? d. Explain the difference between your answers to parts a and b.
The following equations describe an economy. (Think of C , I , G , etc., as being measured in Billions and I as a percentage; a 5 percent interest rate implies I = 5.) C= 0.8(1 - t )Y T=0.25 I=900-50i -G=800 L = 0.25Y-62.5i -M/-P= 500 a. What is the value of aG which corresponds to the simple multiplier (with taxes) ? b. By how much does an increase in government spending of ∆G increase the level of Income in this model, which includes the money market? c. By how much does a change in government spending of ∆G affect the equilibrium Interest rate? d. Explain the difference between your answers to parts a and b.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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The following equations describe an economy. (Think of C , I , G , etc., as being measured in Billions and I as a percentage; a 5 percent interest rate implies I = 5.)
C= 0.8(1 - t )Y
T=0.25
I=900-50i
-G=800
L = 0.25Y-62.5i
-M/-P= 500
a. What is the value of aG which corresponds to the simple multiplier (with taxes) ?
b. By how much does an increase in government spending of ∆G increase the level of Income in this model, which includes the
c. By how much does a change in government spending of ∆G affect the equilibrium Interest rate?
d. Explain the difference between your answers to parts a and b.
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