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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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This note was uploaded on 03/15/2012 for the course EC 111 taught by Professor Timhatton during the Spring '12 term at Uni. Essex.
 Spring '12
 TimHatton

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