Justify!! 1.- In the simple 45º model without public sector or foreign sector, an autonomous spending multiplier equal to 3 implies that when investment increases by 1, consumption increases by 2, right? Justify. 2.- The curve IS has a positive slope. ¿True or False? Justify. 3.- In an income-expenditure model, in which investment depends positively on income and there is no public sector, and increase in the propensity to save Will mean that income, caving and investment decrease, right? Justify

Justify!! 1.- In the simple 45º model without public sector or foreign sector, an autonomous spending multiplier equal to 3 implies that when investment increases by 1, consumption increases by 2, right? Justify. 2.- The curve IS has a positive slope. ¿True or False? Justify. 3.- In an income-expenditure model, in which investment depends positively on income and there is no public sector, and increase in the propensity to save Will mean that income, caving and investment decrease, right? Justify

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter9: Aggregate Demand

Section: Chapter Questions

Problem 5.11P

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Suppose that the government of Uplandia is experiencing a large budget deficit with fixed government expenditures of G=375 and fixed taxes of T= 225. Assume that consumers of Uplandia behave as described in the following consumption function C = 450 + 0.96 (Y - T). Suppose further that investment spending is fixed at 300. a. Calculate the equilibrium level of GDP in Uplandia. Solve for equilibrium levels of Y, C, and S. b. Next, assume that the National Congress in Uplandia succeeds in reducing taxes by 89 to a new fixed level of 136. Recalculate the equilibrium level of GDP using the tax multiplier c. Solve for equilibrium levels of Y, C, and S after the tax cut and check to ensure that the multiplier worked.
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Explain the multiplier intuitively. Why is it that an increase inplanned investment of $100 raises equilibrium output by morethan $100? Why is the effect on equilibrium output finite? Howdo we know that the multiplier is 1/MPS?