McGill University, Macroeconomics Professor Paul Dickinson Discussion Questions #3 Aggregate Demand: Expanding the Simple Model 1: Expanding the Simple Model * C = a+bYd = 50 + 0.7Yd * Yd = Y – T * T = tY = 0.2Y * I= I*=75 * X = X* = 50 * G = G* = 100 * IM = mY = 0.15Y (i) What is the equilibrium GDP? What is the multiplier? (ii) What do you notice about the sum of taxes, saving and imports? (iii) What do you notice about the sum of investment, government expenditure and exports? (iv) Put (iii) and (iv) into “Desired National Saving” and “Desired national Asset Formation” Draw a diagram of the economy in d above, linking the AE diagram with the National Saving and National Asset Formation diagram. Find the intercepts and slopes of all lines . 2. Other Questions a. What would happen to the multiplier if the marginal tax rate (t) were increased? Why? b. If the government increased its taxes and its spending on goods and services by an equal amount, what would happen to equilibrium national income? Why?
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