Answer to Question #225695 in Macroeconomics for Sara

Question

Continue with the same equations.
a. What is the value of aG which corresponds to the simple multiplier (with taxes) of
Chapter 10 ?
b. By how much does an increase in government spending of D −−G increase the level of
income in this model, which includes the money market?
c. By how much does a change in government spending of D −−G affect the equilibrium
interest rate?
d. Explain the difference between your answers to parts a and b .

Answer 1

a)Increase in income tax reduce the multiplier.

b)Increase in government spending increases income.

c)Increase in government lowers interest rates.

d)The government spending makes interst rates low thereby increasing money supply by increasing aggregate demand.