1. In deriving government spending multiplier we assumed that government spending is exogenously fixed. However, it...

 

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1. In deriving government spending multiplier we assumed that government spending is exogenously fixed. However, it is also possible that government spending (G) increases with domestic income (Y). This is represented in the following equation. G=G+gY where G and g are parameters of the fiscal rule. The parameter g is the marginal government spending rate: GDP rises by $1, G rise by 8 g x 1. if Government's choice variable here is G. Derive the government spending multiplier under this setup, i.e. derive AY/AG. 1. In deriving government spending multiplier we assumed that government spending is exogenously fixed. However, it is also possible that government spending (G) increases with domestic income (Y). This is represented in the following equation. G=G+gY where G and g are parameters of the fiscal rule. The parameter g is the marginal government spending rate: GDP rises by $1, G rise by 8 g x 1. if Government's choice variable here is G. Derive the government spending multiplier under this setup, i.e. derive AY/AG.

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Answer Usually we used the government expenditure as exogeneously given But here we are aske... View the full answer