EC111Class12Answers

EC111Class12Answers - University of Essex Spring Term 2012...

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Unformatted text preview: University of Essex - Spring Term 2012 EC111 Class 12 Solutions Question 1 (a) Y = C + I + G Y = A + cY- cT d + I + G Y = 1 1- c ( A- cT d + I + G ) The multiplier for investment is: Δ Y Δ I = 1 1- c (b) The balanced budget multiplier gives the e ect of increase in both G and T d by the same amount. From above: Δ Y Δ G = 1 1- c and Δ Y Δ T d =- c 1- c Adding these e ects together: Δ Y Δ G + Δ Y Δ T d = 1 1- c +- c 1- c = 1 (c) Because T d is a tax on income, the ` rst round' e ect comes through a reduction in consumption that works through the MPC, so it is smaller than the (positive) ` rst round' e ect of G. Question 2 (a) Y = C + I + G- T e Y = A + cY- ct d Y + I + G- t e Y Y = 1 1- c + ct d + t e ( A + I + G ) The multiplier for investment is: Δ Y Δ I = 1 1- c + ct d + t e 1 The denominator is larger because taxes (which are withdrawals from the circular ow) are now related to income. As income increases, withdrawals become larger....
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