Calculation (4 points)
Assume the following model of a closed economy,
C = 0.8(Y ? T)
I = 800 ? 20r
T = 1000, G = 1000
Ms/P = Md/P = 0.4Y ? 40r
Ms = 1200
a) Assume the G increases by 200. According to the Keynesian-cross analysis, what is the government-purchases multiplier (the change in Y resulted from the change in G) and by how much will Y increase?
b) Again assume the G increases by 200. Using IS-LM analysis, by how much will Y increase and what is the government-purchases multiplier (the change in Y resulted from the change in G)?
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