Macroeconomics

Comparative static analysis exercises:

1. consider the three-sector model and :

Consider the three-sector model 10 (1) (2) (3) Y=C+I+G C = a/d + b (O0) Ya=Y-T T =tY+T* (0 0) 1 = 1* (I*>0) G=G* (G* > 0) where G denotes government expenditure and T denotes taxation. (a) Show that (5) (6) Y= at* +b+1* + G* 1-2 + at (b) Write down the government expenditure multiplier and autonomous taxation multiplier. Deduce the direction of change in Y due to increases in G* and T* (c) If it is government policy to finance any increase in expenditure, AG*, by an increase in autonomous taxation, AT*, so that AG* =A7* show that national income rises by an amount that is less than the rise in expenditure. (d) If a = 0.7, b = 50, T* = 200, t= 0.2, I* = 100 and G* = 300, calculate the equilibrium level of national income, Y, and the change in Y due to a 10 unit increase in government expenditure