PEB 2014 Question 9

[onionknight]

Hi. Could anyone check my answers to this question (Q9 peb2014) . The question seems simple enough but I've only just started with macro.

A.) Y= (c0 + b0 + G - c1*T)/(1-c1-b1)
B.) Multiplier= 1/(1-c1-b1) & c1+b1 <1
C.) Both output and saving will increase
D.) Output will still increase but since the multiplier is now 1/(1+c1t1-c1-b1) the increase will be smaller

[onionknight]

Here's the question for your reference


Please help me!

[L]

Yes, you are correct.

This question is straight from Blanchard (Ch- 3, Q8).
Answer:

Y=C+I+G
Y=[1/(1-c1-b1)]*[c0-c1T+b0+G]
b. Including the b1Y term in the investment equation increases the multiplier. Increases in
autonomous spending now create a multiplier effect through two channels: consumption
and investment. For the multiplier to be positive, the condition c1+b1<1 is required.

c. Output increases by b0 times the multiplier. Investment increases by the change in b0
plus b1 times the change in output. The change in business confidence leads to an
increase in output, which induces an additional increase in investment. Since investment
increases, and saving equals investment, saving must also increase. The increase in
output leads to an increase in saving.

Part (d) isn't there. But, your answer is correct.

[onionknight]

Thank you!