Unformatted text preview: his basic logic partly
explains why the federal government emphasized increases in spending rather than tax
reductions in its 2009 budget.
2. Consider the following information for an economy with demand-determined output
and a constant price level.
C= 50 + 0.8Yd
X = 50
IM = 0.15Y I = 75
G = 100
t = 0.25 a. Derive the AE function, using information above.
AE = C+I+G+X-IM = 50 + 0.8Yd + 75 + 100 + 50 - 0.15Y, where Yd = (1 -t)Y = 0.75Y
Then, AE = 275 + 0.8*0.75Y - 0.15Y = 275 + 0.45Y
b. Determine total autonomous expenditures, MPSpend and simple multiplier. How is the
numerical value of MPSpend modified if this economy becomes closed? Explain your
answer from the economic perspective.
Total autonomous expenditures = 275, MPSpend = 0.45, Simple multiplier = 1.82
If the economy is closed, a numerical value of m will be zero. Therefore, MPSpend =
MPC*(1-t) = 0.6. If an economy is closed, no portion of $1 earned in Y is spent on
1 SFU Econ 105 Week 7 Spring 2013 foreign output. Instead, more portion of $1 in Y will be spent on domestic output.
Therefore, MPSpend becomes larger if the economy is closed.
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