Q8 [10 marks]. Consider a closed economy that can be characterized by the standard textbook IS-LM-Phillips Curve model. [IS]: Y = C(Y T,Y\"" T'i 119,141) + 10' ne,Ye,K) + G, .E_ L [I'Ml' P _ V(i)' [Phillips Curve]: 1': = rte + [3 (Yin 1):}? > 0. Note that T denotes government tax and G denotes government expenditure. Suppose that the consumption function C is given by 60' T,Ye Te,i 119,24) = a0 + 1110' T), where no > 0 is the autonomous consumption and 1 > 611 > 0 is the marginal propensity to consume. Suppose further that the investment function 1 is given by {(i rte, Ye, K) = b0 5'10. Ne) , where be > 0 is the investment level when the real interest rate (r = i are) is equal to zero, and b1 > 0 measures the decrease in investment for a unit increase in the real interest rate. Throughout this question, we assume that the central bank will always keep the real interest rate r unchanged by adjusting the money supply M when government expenditure or tax changes. a) Derive the expression for the fiscal multiplier of a tax cut and the expression for the fiscal multiplier of government expenditure. [4 marks] b] Use the Keynesian multiplier effect to explain why the fiscal multiplier of government expenditure is larger than 1. [2 marks] c) Does Ricardian equivalence hold in the economy according to what you've derived in