Macro worksheet 2.pdf - Questions Week 2 Rahul Nath 1 The IS Curve 1.1 Questions from C&S 1 The Government Multiplier Use the equation for the IS curve

Macro worksheet 2.pdf - Questions Week 2 Rahul Nath 1 The...

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Questions - Week 2 Rahul Nath 1 The IS Curve 1.1 Questions from C & S 1. The Government Multiplier: Use the equation for the IS curve in Section 1.2.3 1 to answer the following questions: (a) If we assume that 0 < c < 1, 0 < t < 1 then what can we say about the size of the multiplier? (b) If there is a decrease in government spending of Δ G , by how much does this decrease output? (Please provide an exact amount) (c) Describe the feedback process that means a decrease in government spending can decrease output by more than 1:1. 2. Paradox of Thrift:(TO BE SUBMITTED FRIDAY WEEK 2) Assume that the aggregate demand function is given by, y D = c 0 + c 1 y + I (1) where we assume c 0 = 200, I = 200 and c 1 = 0 . 8 (a) What is the level of output in goods market equilibrium? (b) Assume there is a fall in the marginal propensity to consume to c 1 = 0 . 6 - i.e. there is a rise in the savings rate as c 1 + s 1 = 1. If we assume that the rise in planned savings leads to the accumula- tion of unplanned inventories of goods and does not increase planned investment I
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