Consider two identical countries.The only difference between them is that in country A the marginal propensity to consume (out of disposable income) MPC=0.4 and in country B MPC=0.7.The marginal tax rate t=0.2.I=20,000, G=10,000, NX=25,000-0.2Y (where Y is total income), c₀=15,000.

a)Calculate the multiplier in both countries (round up to two decimal places)

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b)(i)What would be the equilibrium levels of output in country A and country B?

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(ii) Show the equilibrium levels of output in country A and country B on a well labelled graph with aggregate demand on the vertical axis and output (income) on the horizontal axis.

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c)Now assume that consumers lose their confidence and decrease autonomous consumption c₀ from 15,000 to 10,000.What will happen to output in both countries?Which country will have a larger effect on its GDP?Illustrate using the graph from part b).

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question 2.3

Usually investment depends on the interest rate. Briefly explain how an increase in the interest rate r would affect aggregate investment.Use a reference to the expected rate of profit in your explanation.

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