Consider an economy whose aggregate expenditures in the short-run are given by AE = C+I+G +...

  

•  

Transcribed Image Text:

Consider an economy whose aggregate expenditures in the short-run are given by AE = C+I+G + NX, where • C represents desired consumption expenditures, which depend on household's disposable income Y according to the function C = c + MPC. Ya, with c representing the economy's autonomous consumption expenditures and MPC the economy's marginal propensity to consume. Also, disposable income is defined as national income minus net tax revenues, Y Y-T, and T is not a lump-sum amount (like in your EconLab assignment) but an amount that depends on income, that is T = ty. The term t is the economy's net tax rate. • I represents desired investment expenditures, which are independent of national income. • G represents government purchases, which are independent of national income. ● NX represents net exports, given by X-M, where X are exports, independent of national income, and M are imports, which do depend on national income according to the function M=mY. The term m is the economy's marginal propensity to import. This means the aggregate expenditure function can be written as: AE = (c+I+G+X) + [MPC- (1 -t)- m]Y Task 1: Create your own economy by inventing values for all of the exogenous parameters of the model, c,1,G, X, MPC, t,m, with the restriction that all parameters should be positive and MPC, t and m should be less than 1. With these values, find the following: a) The economy's equilibrium real GDP. b) The economy's multiplier. c) The expected change in real GDP that results from investment expenditures I increasing by 15% (Hint: figure out how much autonomous expenditure - the vertical intercept of AE- will increase, and multiply by the multiplier.) Consider an economy whose aggregate expenditures in the short-run are given by AE = C+I+G + NX, where • C represents desired consumption expenditures, which depend on household's disposable income Y according to the function C = c + MPC. Ya, with c representing the economy's autonomous consumption expenditures and MPC the economy's marginal propensity to consume. Also, disposable income is defined as national income minus net tax revenues, Y Y-T, and T is not a lump-sum amount (like in your EconLab assignment) but an amount that depends on income, that is T = ty. The term t is the economy's net tax rate. • I represents desired investment expenditures, which are independent of national income. • G represents government purchases, which are independent of national income. ● NX represents net exports, given by X-M, where X are exports, independent of national income, and M are imports, which do depend on national income according to the function M=mY. The term m is the economy's marginal propensity to import. This means the aggregate expenditure function can be written as: AE = (c+I+G+X) + [MPC- (1 -t)- m]Y Task 1: Create your own economy by inventing values for all of the exogenous parameters of the model, c,1,G, X, MPC, t,m, with the restriction that all parameters should be positive and MPC, t and m should be less than 1. With these values, find the following: a) The economy's equilibrium real GDP. b) The economy's multiplier. c) The expected change in real GDP that results from investment expenditures I increasing by 15% (Hint: figure out how much autonomous expenditure - the vertical intercept of AE- will increase, and multiply by the multiplier.)

Answer rating: 100% (QA)

Here are some parameter values I invented for the economy c 100 I 2... View the full answer