4. Consider the economy is characterised by the following equations: 𝑪 = 𝒄𝟎 + 𝒄𝟏

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4. Consider the economy is characterised by the following
equations: 𝑪 = 𝒄𝟎 + 𝒄𝟏𝒀𝑫 𝑻 = 𝒕𝟎 + 𝒕𝟏𝒀 𝒕𝟏 ∈ (𝟎, 𝟏) 𝒀𝑫 = 𝒀 − 𝑻 𝑮 and
𝑰 are both constant. (a) Find the multiplier. (5 marks) (b) Does
the economy respond more to changes in autonomous consumption (𝒄𝟎),
when 𝒕𝟏 is zero or positive? Explain your answer. (5 marks) (c) Now
assume that taxes are lump sum (constant, i.e., 𝑻 = 𝑻̅), but
investment increases with output through the equation 𝑰 = 𝒃𝟎 + 𝒃𝟏𝒀,
what is the new multiplier? (5 marks) (d) Suppose that the
parameter 𝒃𝟎 increases. If we call this parameter the “business
confidence”, how will equilibrium output be affected by increasing
the business confidence? Will total savings go up by this change?
Explain your answer. (5 marks)

4 Consider The Economy Is Characterised By The Following Equations C C0 C1yd T T0 T1y T1 0 1 Yd Y T G 1 (61.8 KiB) Viewed 41 times

4. Consider the economy is characterised by the following equations: C = Co + CY T = to +tiy t1 € (0,1) Y] =Y-T G and I are both constant. (a) Find the multiplier. (5 marks) (b) Does the economy respond more to changes in autonomous consumption (Co), when tị is zero or positive? Explain your answer. (5 marks) (c) Now assume that taxes are lump sum (constant, i.e., T = 7), but investment increases with output through the equation I = bo + b Y, what is the new multiplier? (5 marks) (d) Suppose that the parameter be increases. If we call this parameter the “business confidence”, how will equilibrium output be affected by increasing the business confidence? Will total savings go up by this change? Explain your answer. (5 marks)