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2. [20 minutes total] Suppose the economy is described by the following equations: . Real Sector (1) Y = Z Output equals aggregate demand, an
2. [20 minutes total] Suppose the economy is described by the following equations: . Real Sector (1) Y = Z Output equals aggregate demand, an equilibrium condition (2) Z = C+I+G Definition of aggregate demand w C=c+qYp - Czi Consumption fn, c, is the marginal propensity to consume (4) Y = Y-T Definition of disposable income (5) T =ty Tax function; t is marginal tax rate. (6) I =bo+by -bi Investment function (7 ) G = GO. Government spending on goods and services, exogenous . Asset Sector i = Ho h h 2.1 (4 minutes) Solve for the IS curve (Y as a function of i). 2.2 (4 minutes) Solve for equilibrium income. 2.3 (4 minutes) Calculate the government spending multiplier. 2.4 (4 minutes) Is the government spending multiplier smaller than in the standard model covered in class? Why or why not? 2.5 (4 minutes) Is monetary policy more or less powerful than in the standard model covered in class? Why or why not
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