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Unformatted text preview: this model the government must collect tax T to pay for government spending G . Speci&cally a Keynesian equilibrium implies Y; C and T must satisfy the following three equations: Y = C + I + G C = A + m ( Y & T ) T = G where consumption depends on after-tax income Y & T: Note A ; I ; G are numbers (exogenous variable). m is the marginal propensity to consume and satis&es < m < 1 : Using substitution and elimination, solve these three equa-tions for equilibrium Y; C; T as functions of the exogenous variables A ; I ; G : How does an exogenous increase in government spending G a/ect aggregate output Y (with budget balance)? How about a credit crunch which reduces spending A ? Why? 4. Why do I call the above dodgy macro? What was Keynes±defence of this model? Why isn±t m = 1? Think about it. 1...
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- Winter '11