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1. Consider the following economy: C = co+c1 (Y – T), I = ao + a1Y, I2 (1+8) I1, T = sl + G and Z = C+I2 + Ğ. Parameters ao and co are positive: ao > 0 and co > 0. Parameters a1, ci and s are between 0 and 1: a1 E (0, 1), ci € (0, 1) and s e (0, 1). In this economy, business investment (I1) depends on the level of economic activity (Y). The government wants to encourage investment so for each dollar of investment they offer a subsidy of s dollars (think of the subsidy as a negative tax: instead of taking money from you, the government gives money to you). (a) Derive an expression for the equilibrium level of output. What is the government expenditure multiplier? (b) If s = 0, what is the equilibrium level of output? What is the government expenditure multiplier? Briefly explain why the multiplier has this value. (c) Use algebra to compare the goveri.nient expenditure multipliers in parts (a) and (6). Which one is greater? Briefly explain the economic intuition behind your result

1. Consider the following economy: C = co+c1 (Y – T), I = ao + a1Y, I2 (1+8) I1, T = sl + G and Z = C+I2 + Ğ. Parameters ao and co are positive: ao > 0 and co > 0. Parameters a1, ci and s are between 0 and 1: a1 E (0, 1), ci € (0, 1) and s e (0, 1). In this economy, business investment (I1) depends on the level of economic activity (Y). The government wants to encourage investment so for each dollar of investment they offer a subsidy of s dollars (think of the subsidy as a negative tax: instead of taking money from you, the government gives money to you). (a) Derive an expression for the equilibrium level of output. What is the government expenditure multiplier? (b) If s = 0, what is the equilibrium level of output? What is the government expenditure multiplier? Briefly explain why the multiplier has this value. (c) Use algebra to compare the goveri.nient expenditure multipliers in parts (a) and (6). Which one is greater? Briefly explain the economic intuition behind your result

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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1. Consider the following economy: C = co + c1 (Y – T), II = = ao + a1Y, I2 (1+s) I1, T = sl + G and Z = C+I2 + Ğ. Parameters a and co are positive: ao > 0 and co > 0. Parameters a1, ci and s are between 0 and 1: a1 € (0, 1), cı E (0, 1) and s e (0, 1). In this economy, business investment (I1) depends on the level of economic activity (Y). The government wants to encourage investment so for each dollar of investment they offer a subsidy of s dollars (think of the subsidy as a negative tax: instead of taking money from you, the government gives money to you). (a) Derive an expression for the equilibrium level of output. What is the government expenditure multiplier? (b) If s = 0, what is the equilibrium level of output? What is the government expenditure multiplier? Briefly explain why the multiplier has this value. (c) Use algebra to compare the goveri.nient expenditure multipliers in parts (a) and (6). Which one is greater? Briefly explain the economic intuition behind your result
Transcribed Image Text:1. Consider the following economy: C = co + c1 (Y – T), II = = ao + a1Y, I2 (1+s) I1, T = sl + G and Z = C+I2 + Ğ. Parameters a and co are positive: ao > 0 and co > 0. Parameters a1, ci and s are between 0 and 1: a1 € (0, 1), cı E (0, 1) and s e (0, 1). In this economy, business investment (I1) depends on the level of economic activity (Y). The government wants to encourage investment so for each dollar of investment they offer a subsidy of s dollars (think of the subsidy as a negative tax: instead of taking money from you, the government gives money to you). (a) Derive an expression for the equilibrium level of output. What is the government expenditure multiplier? (b) If s = 0, what is the equilibrium level of output? What is the government expenditure multiplier? Briefly explain why the multiplier has this value. (c) Use algebra to compare the goveri.nient expenditure multipliers in parts (a) and (6). Which one is greater? Briefly explain the economic intuition behind your result
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