What is the multiplier value and what is the size of gdp

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Reference no: EM133537445

Problem

This question looks at the investment multiplier once again. Illustrate this multiplier in a two-sector model with the following information: Let Y = $1000 start, APS = .4, MPC = .70 and equilibrium exists. Now suppose investment increases by $20. Illustrate three cycles on the circular flow diagram, illustrating Y1, Y2, Y3 and stop at Y4. Finally compute and show Yn, and all corresponding values on the circular flow diagram.

Question 1. What is the multiplier value? What is the size of GDP at the start and at the end of the problem?

Question 2. Now assume that we have a three-sector model. Let the Government Sector receive indirect taxes but does not collect direct taxes. In this model, let Depreciation exist. Suppose, somewhat unrealistically, FC = IT= D always. Redo the problem as noted above. What is the multiplier value? What is the size of GDP at the start and at the end of the problem?

Question 3. Are the multipliers the same, are the GDP values the same? Briefly explain.

Reference no: EM133537445

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