Question

1. Assume an goods and services market of an economy is characterized by the following equations:

C = 0.8 (Y - T) I = 800 -20r Y=C+I+G T = 1000 G = 1000

a) Consider for the moment the Keynesian Cross model. What will happen to the GDP if G increases by 200? What is the multiplier?

b) Keep considering the Keynesian Cross model. What will happen to the GDP if T increases by 200? What if both G and T increase by 200?

Answer 1

C: 0.8(4-1)-,I=800- 20€, 6=1000, T: 10.00 Multiflies & I 1-4 1-0.8 ²1 02 - 5 Ale AY 5 If G increases G inreased by 200, then AY=5 X 200 AY= 1000] Hence 5:D:P will inestate by $1000 D So now as we now Y = C+ I tho takily &- I to (Assaulten) yao: 8(4-1000) +800-204 + Jood Y = 0.84 -800+800 -20 (1) + Iooo 0.24 = 980 4-9800 o'z Y= 4900

If I increases by 200, New 7 = 1200 Ye 0.844-1200) + 800-2000) tloos Yeo-84-960 + 800 -20 + lood 0.24 = 820 Y = 8200 4100 oft tree h.D. I will fall by 800 2) If h And I hiss ky 200 y = 0.864-1200) +800-20 (1) +1200 y=0.84-960 +80o-20+1200 730.24 - 108 (lue lozão 5100 oz y = 5loo h.D.P will rise to 4900 (Note assumptar of 2 - I will not affect affect our answers