Given the simple model and some simple assumptions about

Given the simple model and some simple assumptions about the goods market, compute the multipliers requested below.  Make the following assumptions:

The Total Demand for Goods:  Z= C + I + G

The Goods Market Equilibrium: Y = Z

Linear Consumption Function: C =c(YD) = c0 + c1Yd

Disposable Income:  YD = Y - T

Exogenous Investment: I = I¯

1) Given the above assumptions, graph the model of the goods market, and label the axes, the functions, and the equilibrium point and value of Y.

2) On the graph, show what would happen if government expenditures were increased due to expansionary fiscal policy.

3) Given the above assumptions compute the fiscal policy multiplier.

4) Given the above assumptions compute the tax multiplier on T.

5) Assume that there is a balanced budget and that G is held equal to T.  Now compute the fiscal policy multiplier.

The Total Demand for Goods:  Z = C + I + G + (X - Im)

Linear Import Function: Im = mY

Exogenous Exports: X = X¯

6) Go back to the assumptions from (1), (2), and (3).  Assume now that there is trade, with a marginal propensity to import of 'm'.  Now compute the fiscal policy multiplier.

7) Assume now that there is both trade and a proportional income tax such that  T = tY.  Now compute the fiscal policy multiplier.

8) Go back to the original model used in questions 1-3.  Assume that I = \$1300 billion, G = \$1200 billion, T = \$1100 billion, c1 = 0.60, and c0 = \$1400 billion.  What is the equilibrium value of GDP (Y)?  What is the equilibrium value of consumption (C)?  What is the numerical value of the fiscal policy multiplier?

9)  Assume that c1 = 0.90, c0 = \$1400,  m = 0.10,  and  t = 0.15.  Using the formulas for the multipliers that you calculated above, compute the numerical value for each fiscal policy multiplier -  the original multiplier (3), the balanced budget multiplier (5), the multiplier with imports (6), and the multiplier with imports and proportional taxes (7).

10)  Compare the four multipliers numerically, and explain why you think each multiplier is different.

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