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1. Suppose that the model of the economy is given by Y = C + I...

1. Suppose that the model of the economy is given by Y = C + I + G + X C = a + b Yd Yd = (1 – t)Y X = g – mY a. Derive the equilibrium GDP (Y) and the expenditure multiplier (Me ) expressed in general notations. b. Suppose I = $900 billion, G = $1,200 billion, a = 220, b = 0.9, t = 0.3, g = 500, and m = 0.1. Solve for the equilibrium GDP (Y) and the expenditure multiplier (Me ) using your answers to part a. c. Is the expenditure multiplier (Me ) with variable import spending (refer the numerical solution of Me from part b) larger or smaller than the expenditure multiplier (Me ) with fixed import spending? In addition to an algebra comparison, provide an intuition with your answer. Hint: The expenditure multiplier (Me ) with fixed import spending (i.e. constant X)) is 1 1−?(1−?) , in the problem, b = 0.9, t = 0.3. d. Solve for private saving (Sp), government saving (Sg), and the rest of the world saving (Sr) when investment spending (I) is $900 billion

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