Figure 2 450 pae pae1 pae0 c c ct c 1 t y a c1 c

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Unformatted text preview: he points C and C’ respectively on PAE1 and W1. As drawn, the payment has eliminated the contractionary output gap. Note the operation of the multiplier; the change in equilibrium GDP is greater than the initial change in PAE. FIGURE 2 450 PAE PAE1 PAE0 C C cT c (1 t )Y A C1 C cT1 c(1 t )Y W C cT J P C cT W1 A’ JP Y Y0e C cT1 Ye* FIGURE 3 450 PAE PAE1 PAE0 C C C cT c (1 t )Y B A C1 C cT1 c(1 t )Y W C cT J C cT P W1 A’ C’ B’ C cT1 Y0 JP Y e Ye* Part (b) In this instance, the upward shift in the consumption and PAE schedules would be much reduced (in effect, it is the same analysis as part (a) with a lower marginal propensity to consume). In Figure 4, this would lead to PAE2, as opposed to PAE1, i.e., less of the payment would be used for consumption (the consumption function is not shown for simplicity). Similarly, withdrawals would only fall to W2 as almost, but not all, of the tax decrease would be saved. The result would be equilibrium at points D and D’. Note that the slopes of both lines are affected by the change in the mpc, as shown in the diagram. Note that the same processes as described in part (a) would shift the economy from its initial equilibrium to its new equilibrium. However, the fact that more of the payment is saved means a reduced multiplier or, equivalently, an increase in equilibriu...
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This document was uploaded on 03/28/2014 for the course ECON 10003 at University of Melbourne.

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