Assume a closed economy (no import or export) characterised by the following equations describing the behaviour of aggregate demand: Consumption function: C = Co + C₁(YT) T = to +t₁Y [Taxation rule] Investment and government spending are assumed to be constant: I = I and G = G Where co is autonomous consumption, to is autonomous taxation, C₁ = 0.6 is the marginal propensity to consume, t₁ = 0.2 is the sensitivity of tax revenues to income. a) Explain why it is reasonable to assume that government tax revenues would respond to changes in income. b) Solve for the equilibrium output in the goods market. c) What is the Keynesian multiplier in this economy? How is it related to the parameters of the model. d) Assume autonomous consumption co falls by £1 Billion. Calculate the change in equilibrium output. Represent the effect of the shock on a Keynesian cross diagram. Complete the table below and explain in words how the taxation rule affects the Keynesian multiplier. e) f)

• Assuming that there is no government spending or trade, an economy's GDP is the sum of domestic consumption C and investment I, ie. Y = C+ I • Assume that I is unaffected by GDP • Assume the consumption function is C = co + cY • In any equilibrium aggregate demand, AD must be equal to Y, GDP. Given this model, which of the following statements is correct? This question is worth 2 marks! Select one or more: a. The aggregate demand equation is given by AD = co + CY + I b. c, is equal to autonomous consumption c. if c, is a number between 0 and 1, and I+co >0 then the aggregate demand equation is a straight line that must intersect the 45 degree line at some point. d. In a demand-driven economy the AD curve is a vertical line e. In a demand-driven economy demand is equal to supply in equilibrium f. In a supply-driven economy demand is equal to supply in equilibrium g. In a demand-driven economy, supply creates its own demand h. If the economy above is a demand-driven economy, then the…

MACRO QUES!

Assuming that there is no government spending or trade, an economy’s GDP is the sum of domestic consumption C and investment I, i.e. Y = C+ I Assume that I is unaffected by GDP Assume the consumption function is C = c0 + c1Y In any equilibrium aggregate demand, AD must be equal to Y, GDP. Given this model, which FIVE of the following statements are correct?   Select one or more: A. If the economy above is a demand-driven economy, then the equilibrium solution for Y is given by Y = m(c0 + I), where m = 1/(1 - c1) is the multiplier. B. if c1 = 0.8 the multiplier is equal to 1/0.8= 1.25 C. if c1 = 0.75 the multiplier is equal to 4 D. assume c0 =100, I=50, c1=0.6. The equilibrium value of Y in a demand-driven economy is 300. E. Assume that Y is initially 400, I is initially 100, and the multiplier is 2.5. I increases by 10%. The multiplier implies that in equilibrium Y will increase by 25%. F. The higher is c1 the larger is the multiplier G. If consumers…