Required Questions: 10 points Q1. Suppose that a closed economy is characterized

ID: 1152840 • Letter: R

Question

Required Questions: 10 points

Q1. Suppose that a closed economy is characterized by the following behavioral equations:

C = c0 + c1YD

YD= Y-T

T, G and I are all constant.
(1) Please solve for equilibrium output.

(2) What is the multiplier?
(3) What is the autonomous spending?

Suppose T = t0 + t1Y,
C = c0 + c1YD,

YD = Y-T

G and I are both constant. Assume that 0< t1 <1 and t0 >0

(4) Please solve for equilibrium output.
(5) What is the multiplier?
(6) Compare your answer in parts (2) and (5). Does this economy respond

more to changes in autonomous spending when t1 > 0?
(7) Why is fiscal policy in this case called an automatic stabilizer?

(https://www.investopedia.com/terms/a/automaticstabilizer.asp)

1) in equilibrium, Y= C+I+G

Y= c0+c1YD + G + I

YD= Y-T

Y= c0 + c1(Y-T) + G + I

Y(1-c1))= C0 - c1T + G + I

Y= {1/(1-c1)}(C0 - c1Y + G + I)

This is the equilibrium equation.

B) multiplier= 1/(1-c1), it is change in income due to change in autonomous spending.

C) autonomous spending does not depend on income. It is c0+G+I

D) Y= c0 +c1(Y-t0-t1Y) + G + I

Y= c0 + c1Y - t0c1 - c1t1Y + G + I

Y(1-c1 + c1t1) = c0-t0c1 + G + I

Y={1/(1-c1+c1t1)(c0 - t0c1 + G + I)

5) multiplier= 1/(1-c1+c1t1)

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