What is the government expenditure multiplier in this example and what does it depend on?

  • Suppose you have the following information:

mpc = .75, d = 0.3, x = 0.1

  • (4 points) Calculate simplified expressions for the consumption function, investment function, and the net export function.(4 points) Calculate an expression for the IS curve, Y in terms of r

    (5 points) Draw a graph of the IS curve and locate equilibrium output when the real interest rate = 2 as point A and equilibrium output when the real interest rate = 5 as point B.

    (4 points) Explain why equilibrium output is different at point B relative to point A. Be specific.

    (4 points) Now suppose government purchases rise to $4.2 trillion (from $3.5 trillion), what will happen to equilibrium output when r = 2 (label as point C)? When r = 5 (label as point D)

  • (4 points) What is the government expenditure multiplier in this example and what does it depend on?

 

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