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Worksheet_on_multiplier

# Worksheet_on_multiplier - Econ 002 Kyle and Wissink...

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Econ 002 Kyle and Wissink sections should understand this handout. Understand this simple model and expand it by adding more terms into the AE Scenario 1: Assume a simple Keynesian model Y = C + I where C = a + bY C = 190 + 0.9Y and I = 50 In this model if C = 190 + 0.9Y , then S = -190 + 0.1Y And Y = C + S = 190 + 0.9Y -190 + 0.1Y = Y Define AE = C + I Y = AE Solve for Y using Y = 190 + 0.9Y + 50 Calculate S. Compare S to the value to I S is called a leakage and I is called an injection. Change I from I = 50 to I = 51 Solve for Y using Y = 190 + 0.9Y + 51 Calculate S. Compare the levels of S and I You will find that \$1 change in I has lead to \$10 change in Y. The spending multiplier is 10 Scenario II: Assume a more interesting Keynesian model Ignore NX; let NX = 0 Y = C + I + G where C = a + b(Y-T) C = 190 + 0.9(Y – 100); G = 100; T = 100, and I = 50 In this model if C = 190 + 0.9(Y-100) , then S = -190 + 0.1(Y-100) And Y = C + S + 100 = 190 + 0.9(Y –100) - 190 + 0.1(Y-100) + 100 = Y Or (Y – 100) = 190 + 0.9(Y –100) - 190 + 0.1(Y-100) = (Y-100) = C + S Y = C + S + T Solve for Y using Y = 190 + 0.9(Y-100) + 100 + 50 Calculate S. Compare the levels of (S+T ) and (I + G) (S+T) are called leakages and (I+G) are called injections Change I from I = 50 to I = 51 Solve for Y using Y = 190 + 0.9(Y-100) + 100 + 51 Calculate S.

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Worksheet_on_multiplier - Econ 002 Kyle and Wissink...

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