Question

Let Ny = nNe⁻¹ and Mₜ = zMₜ₋₁ for every period t, where z and n are both greater than The money created each period is used to finance a lump-sum subsidy of a* goods to each young person.

(a) Find the equation for the budget set of an individual in the monetary equilibrium.
a) Ny = nNe⁻¹
b) Mₜ = zMₜ₋₁
c) a = nNe⁻¹
d) Mₜ = aMₜ₋₁"

Answer 1

To find the equilibrium level of national income, set aggregate expenditure equal to national income and solve for government spending adjustments needed for a target GDP. This involves calculating the multiplier to understand the effect of fiscal changes.

Step-by-step explanation:

Calculating the equilibrium level of national income in an economy involves setting aggregate expenditure (AE) equal to national income (Y). The given equations incorporate several economic factors including consumption (C), taxes (T), investment (I), government spending (G), exports (X), and imports (M). This model assumes that all expenditures and outputs are in equilibrium when AE equals Y.

To find the equilibrium, you would sum up all components of AE, including autonomous consumption, investment, government spending, exports, and adjust for taxes and imported goods. This can be represented as AE = C + I + G + X - M. With the provided coefficients and constants, one can insert values into the equation and solve for government spending adjustments necessary to reach a target GDP.

Calculating the multiplier is another method to determine how changes in government spending will impact the equilibrium level. The multiplier effect reflects the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending. Understanding this concept can help in making fiscal decisions to reach desired macroeconomic targets.