# Consider the following model i) C = 1650 + mpc (Y - tY) ii) I = 800

iii) G = 500

iv) X - M = 500 - mpi (Y)

where:

t = the (flat) tax rate

mpc = the marginal propensity to consume

mpi = the marginal propensity to import

**suppose mpc = .60, t = .15, mpi = .2**

a. Given the information above, solve for the equilibrium output:

b. We know that the formula for the (government) spending multiplier is 1/(1-[mpc(1-t) - mpi]). The value of the government spending multiplier in this problem is:

c. When we discussed the multiplier we discussed the impact effect. For example, suppose that G increases by **100 **to 600 and we assume, as we often do, that firms match the increase in demand by increasing Y by 100. In round two, this is an **increase in income of 100 to consumers**. We will **trace out exactly where this 100 increase in income goes in the second round**. Recall, there are three leakages to address (via taxes, imports and savings).

Given that t=.15, we know that .15 of every dollar increase in gross income is a leakage due to taxes. Since the increase in income is $100, we know the leakage due to taxes is:

d. Given that mpi=.2, we know that .2 of every dollar increase in gross income is a leakage due to imports. Since the increase in income is $100, we know the leakage due to imports is:

e. Given that the MPC=.6, we know that .4 of every dollar increase in gross income is saved. Since the increase in income is $100, we know the leakage due to savings is:

f. What would happen to the multiplier if the mpi rises to .25? **Round to 2 decimal places.**

**g. **What would happen to the size of the leakage if the mpi rises to .25?

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