Answer Happy

EC1101 Question 11. Consider an open economy characterised by the following: C = 500+ 0.8(1 – t)Y t = 0.25 I = 1200 G = 800 X = 1250 M = 0.18, where C is consumption, I is investment, G is government spending, t is the tax rate, M is imports and x is exports. Note that households consume out of their disposable income (1 – t)Y. a) Solve for equilibrium output Y* in this economy. (4 marks) b) What is the multiplier in this economy? (2 marks) c) The government decides to do a fiscal stimulus by raising government expenditure by 1.000. Calculate the change in output without calculating the new output level as you did in a. (tip: use the multiplier) (3 marks) d) Explain why the change in output is larger than the size of the fiscal stimulus and how the multiplier works in the path towards the new output level. Plot the adjustment path using aggregate demand (AD) and the Y = AD line. (Note: you are not expected to calculate the changes in output and demand during the adjustment.) mark