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1. Consider the following closed economy model. Y = AE in equilibriumAE = C + I + GC = Ca+ b YD 0 < b
1. Consider the following closed economy model. Y = AE in equilibriumAE = C + I + GC = Ca+ b YD 0 < b < 1YD = Y -TT = Ta+ t Y Ta> 0, 0 < t < 1I = IaG = where is constant (a)Solve for the equilibrium level of Y, Y*.(b) Obtain the government expenditure multiplier, dY/dG. (c) Obtain the lump sum tax multiplier, dY/dTa. (d) Suppose that G and Taare simultaneously increased by the same amount. This change would have no initial effect on the government deficit. What would be the effect on output?
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