Given the following model YCIGXZ CabY ZZ0 zY where I90 G65

Given the following model: Y=C+I+G+X-Z

C=a+bY

Z=Z₀ + zY

where I=90, G=65, X=80, a=70, Z₀=40, b=0.9, z=0.15

The equilibrium level of income Y* was calculated to be 1060.

a) Given the information in the above description, what is the value of the government expenditure multiplier? Show all steps.

b) What is the numerical value of the government expenditure multiplier if z=0? SHOW ALL STEPS.

Solution

a)Given Y=C+I+G+X-Z

C=a+bY=70+0.9x1060=1024

Z=ZO+zY=40+0.15x1060=15900

G=65

Multiplier= 1-1/0.15= 5.66

b) Multiplier if z=0

b=0.9

Hence, Multiplier=1-1/0.9=0.11

By,

Nishant Bhatt