In 2008 (before the new policies from question 1a were introduced), Canada and the United States had the following desired aggregate expenditure functions

($billions)

Canada

USA

Consumption

265+0.62*Y_D

2,177+0.75*Y_D

Investment

320

1,629

Government

334

2,931

Exports

439

1,564

Imports

0.3*Y

0.14*Y

GDP (Y)

1,535

14,190

Tax rate

0.33

0.26

Disposable Income (Y_D)

Y_D = (1-0.33)*Y

Y_D = (1-0.26)*y

Potential GDP (Y*)

1,633

15,424

For each country calculate the multiplier in 2008 before the policy change.

Assuming that the policy changes in 2009 are the only changes that take place in the Canadian and US economies, calculate the multiplier in 2009 after the policy change.

Explain any differences in the multiplier after the policy change in each country.Explain the differences in multipliers between the two countries.

MPC is the marginal propensity to consume (see consumption equation in the table above)

t is the tax rate (in the table above)

m is the marginal propensity to import (it's in the imports equation in the table above)

Y_D = (1-t)*Y, where Y_D is disposable income

QUESTION 1c) (10 Points)

Find the new equilibrium GDP (Y) for each country after implementing their expansionary fiscal policies.Show your calculations.

QUESTION 1d) (20 points)

Which country chose the wiser policy to deal with a recessionary gap?Use your analysis to justify your answer.Is additional information you would need to help choose which policy option was wiser?