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Discussion in 'Economics' started by supermariooo, Nov 12, 2011.

1. ### supermariooo

Can anyone help me to solve the following question??
I don't understand how to do part (c) and (d).
Many thanks: )

18. Consider a simple goods market model:
Consumption: C = a + bY
Investment: I = ÃÂ± Ã¢Ëâ ÃÂ²i
Government expenditure: G = G0

(a) Use a diagram of simple Keynesian model (Keynesian cross) to illustrate
the equilibrium national output. You should clearly indicate the numerical
values for the intercept and the equilibrium output in the diagram.

(b) Assuming interest rate remains constant, calculate the government
multiplier.

(c) Call the equilibrium output as Y1 after the government expenditure
increases by \$1 under the assumption in (b).
If interest rate is flexible, after the \$1 increase in government expenditure,
output in the goods-money market equilibrium is Y2.
Use a diagram (donÃ¢â¬â¢t calculate the values) to indicate Y1 and Y2.

(d) For (b) and (c), we assume general price level is fixed. If price is flexible,
the equilibrium output is Y3. Illustrate Y1, Y2, and Y3 in the aggregate
supply-aggregate demand model and in the IS/LM model.

2. ### tommintj

I don't understand the notation for I (investment). The terms need to be defined better. "If gov't speeds \$1..." appears to come from outside the system otherwise we need a subtraction from assets or a net present value drain (taxes) from the taxpayer. Obviously if a taxpayer has greater efficiency of spending \$1 of his own assets, then gov't spending and consequently taxing will decrease the return on total assets over time.

3. ### AKUMATOTENSHI

(C) Equlibrium output only lasts as long as you can't push anymore crap into the system. The interest rates will be changed as needed to sell Treasury bonds to the dumb asses who by them. You show them what they want to see and have them sign the dotted line. Between year 1 and year 2 your model changes so you can offload as much toxic debt as possible. The diagram would look like a giant finger stuck in somebones bung hole so that the knuckles are about to enter.

(D) The price model will always flexible inorder capture as much capital as possible. Equilibrium is never reached because someone wants to eat your lunch and whatever move you make someone will counter it.

Real world economics is law of the jungle and that is it!

Welcome to Planet Misery,

Akuma