problem code : 180609MACRO

[vishruti]

Consider a closed economy with C = C' + cY (C' is atonomouus consumption), I = I'(I' is fixed investment) and no no government sector, what effect does the increased desire to save have on the new equilibrium level of output? What is the economic term for this case?

If the government sector is included such that G = G' (G' is fixed) and the tax rate is t on income such that  0<t<1 and C =C' + cYd (where Yd is disposable income) , find the multiplier. What happens if we assume that t = 1 and t = 0? Consider another situation in which the government has balanced budget such that G = tY , which means that whatever is generated as tax revenue is same as the government expenditure. Find the multiplier and compare with the previous situation. find whether the equilibrium level of output increases/decreases/unchanged when c increase in the two cases. Consider another situation such that t=t' ( t' is lumpsum tax) and solve for the multiplier for the above two cases again and compare the results.

[nidhi]

1. if everyone desires to save more then MPS i.e (1-c) increases but since this is a 2 sector model and S=I and because I = constant so total savings do not increase but equilib Y decreases. its called Paradox of Thrift

2.a)multiplier(M)= 1/1-c(1-t)
when t=o , M= 1/1-c
when t=1 M= 1

b) when G= tY
M=1/1-c(1-t)-t =1/(1-c)(1-t)
its greater than previous case

[vishruti]

the answer given by nidhi is correct

but she has not solved for the lump sum tax case

the answer for that is 1/1-c