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[answered] 1) Part A) Suppose a hypothetical economy is characterised


1) Part A) Suppose a hypothetical economy is characterised by the following equations C = a + bYD (Consumption Function) I=Io G=G0 T=T0 X=X0 (Investment) (Government Expenditure) (Tax function) (Exports) M = mg + m1YD (Import function) Where YD is the disposable income and Y is GDP. a and mo are autonomous consumption and autonomous imports respectively. b and m1 are marginal propensities to consume and marginal propensities to import respectively. Find the equilibrium level of income (YE), the value of the Keynesian multiplier/autonomous expenditure multiplier. Part B) Based on the equations and answers to part A, answer the following questions. (Treat every sub question as an independent question, unless otherwise mentioned) I. II. III. IV. Explain in brief the meaning of marginal propensity to consume? Can in take a value greater than 1? Can it ever be zero? Explain in detail. Give examples to corroborate your answers. What is the meaning of autonomous consumption? Where would funds for autonomous consumption come from? Can it ever be zero? Similarly, explain the meaning of autonomous imports. Explain in detail and give examples to corroborate your answer. Suppose there was a 50 unit increase in government expenditure which was financed by a simultaneous 50 unit increase in taxes. Calculate the net change in Y as a result of this policy action. Derive the equation for the IS curve based on the above equations. What is the slope of the IS curve? Based on the equation you got for the IS curve in part IV what factors would cause an increase in the IS curve.
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