Question

A closed economy has household, business, and government sectors. Households C-3+0.80(Y-T) Businesses I=8 Government G=21 T = 20 This economy is in an underemplo nent equilibrium with Y = 80. Full-employment output (potential output) is 100. The government is advised by Keynesian economists to increase government demand from 21 to 25. The government does so. AG = +4. la Solve for the series of increases in output (real income), Y. Round AG AY AC +4.000000 +4.000000 +3.200000 +0.000000 +3.200000 +2.560000 1b The income increases become ever smaller, but they continue ad infinitum. Write your AY column as the following sum XAY = 4 + 3.2 + two more AY + many more AY not calculated Create a second infinite series which is 0.8 times this first infinite series that is 0.8xXAY. After subtracting the second series from the first solve for SAY.

Answer 1

AY AG - AC .. (1) Now C. 3+ 08 (Y-T). :.AC = O'S AY ... (2) table for round I to a Using c) in giren Round - and (2) the table. : AG 1 4 0 0 0 AY 4 3.2 2.56 2.048 AC 3.2 2.56 2.048 1.6384 3 4 (1) from the table : Zay :4 + 3:8 + 2.5%+ 250A8,+ ... - 08&AY =42+2567 29898 2'048 + .. . ... ..(2) (1)-(2) ZAY 0.8EAY : 4 .. .: a0:2 LAY : 4 . : EAY : 20