Economics 420  Spring 2010
Mike Aguilar
UNC at Chapel Hill
HW
#
5 Due  03/01/2010
Instructions
:
•
Please explain your answers thoroughly and show all necessary work.
•
State your assumptions carefully.
•
There may be more than one correct solution.
•
Please type your answers whenever possible.
•
Students may work together, but each must submit their own work.
•
The honor code is in eﬀect.
•
Note: Maintain a ceteris paribus assumption when interpreting all shocks.
1. (8pts) Consider a closed Keynesian economy, which is described as follows:
I
=
¯
I

i
1
r
,
C
=
α
0
+
α
1
(
Y

T
)

α
2
r
, and
M
d
=
c
0
+
c
1
Y

c
2
r
, and
G
and
M
s
are exogenous. In the following, examine
two cases: Case 1:
α
2
= 0; Case 2:
α
2
>
0.
•
Compare the government spending and tax multpliers in both cases.
Answer:
From class, we know that when
c
2
= 0,
∂Y
∂G
=
1
1

α
1
. When
c
2
>
0, we must solve for the
multplier via the IS curve as follows:
Y
=
α
0
+
α
1
(
Y

T
)

α
2
r
+
¯
I

ı
1
r
+
G
Y
(1

α
1
) =
α
0

α
1
T
+
¯
I
+
G

r
(
α
2
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 Spring '08
 Hill
 Economics, Macroeconomics, Supply And Demand, Great Depression, Keynesian economics

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