1. Suppose you are given the following fixed-price Keynesian model: C = 480 + 0.

Question

1. Suppose you are given the following fixed-price Keynesian model:

            C = 480 + 0.9Yd

            I = 200

            G = 100

            X = 200

            M = 100 + 0.1Yd

            T = 100

            a. Find the aggregate expenditure function.                                        

            b. Find the equilibrium level of real GDP.                                           

            c. What is the spending multiplier in this model? Tax multiplier?

            d. Show that leakages = injections at equilibrium.                               

            e. If taxes increase by $100, what is the new equilibrium level of

                 GDP?                                                                                             

            f. Show your answers to b) and f) graphically.

**Need e and f answered especially**

Explanation / Answer

A. Aggregate expenditure = C+I+G+X -M

B. Substitute all values in aggregate expenditure and Yd = Y - T

Y = 480 + 0.9(Y-100) + 200+ 100+ 200 - 100-0.1(Y-100)

Y = 480 + 0.9Y - 90 + 500 - 100 - 0.1Y + 10

Y - 0.9Y + 0.1 Y = 900

Y = 900 / 0.2

Y = 4500

C. Spending multiplier = 1/1-marginal propensity to consume

M = 1/ 1- 0.9

M = 10

Tax multiplier = -b / 1-b

Tm = -0.9 / 1-0.9

Tm = -9

E. Tax multiplier = dY / dT

dY = -9*100=90

New GDP = 4500-90 = 4410

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