Explore BrainMass

Explore BrainMass

    Multiplier accelerator interaction

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Consider a macro model that has both a consumption function that depends on lagged income (Like Freidman's permanent income equation) and an investment equation that depends with a lag, on changes in income. Ignore interest - rate effects. In particular assume that the following equations describe the economy
    Y= C+I+G
    C= 220+ 0.63Yp with Yp =0.5(Y+ Y-1 )
    I= 900 + 0.2(Y-1 - Y-2)
    G= 1200
    A. By algebraic substitution of Can I into the income identity, obtain a single expression for both output Y in terms of output in the previous years (Y-1 and Y-2)
    B. Calculate the constant level of output Y that satisfies all the relationships in the model (Hint set Y -1 =Y and Y -2 =Y in the equation from part a and solve for Y using algebra
    C. Suppose that y is = to the value you calculated in part b for the past 2 years (Years 1 and 2) Now suppose that government spending increases by $50 billion in year 3 calculate the effect on output in year 3 . Calculate the effect on output in years 4 through 10 . Be sure to use the relationship you derived in part a and substitute the values for Y -1 and Y -2 you calculated in the previous two steps.
    D. Plot the values of Y on a diagram with the years on the horizontal axis. Do you notice any cyclical behavior in Y. Explain what is going on ( this model was originally developed by Paul Samuelsson of M.I.T) while a student at Harvard in the 1930's

    © BrainMass Inc. brainmass.com October 10, 2019, 7:14 am ad1c9bdddf

    Solution Summary

    This solution answers questions about multiplier accelerator interaction.