Question

2.1 Consider a closed economy that is described by the following model:

C = 280m + 0.72Y

Where:

C = Consumption Y = Income

I = 150m I = Investment

G = 300m G = Government spending

T = 22% t = Tax rate.

2.1.1 Calculate the multiplier. (3)

2.1.2 Calculate the total autonomous spending. (2)

Answer 1

2.1.1 Calculate the multiplier. (3)

Solution.

$\alpha$ = 1/1(1-C)

C(CMPC)= $\Delta$ C/$\Delta$ Y = 0.72 =C

$\alpha$ = 1/(1-0.72)

= 3.5714

2.1.2 Calculate the total autonomous spending. (2)

Solution

$\Alpha\omicron$ = C + I + G

= 280m + 150m + 300m

= 730m