A) Assuming the tax function now consist of autonomous and a proportional taxes and the...
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A) Assuming the tax function now consist of autonomous and a proportional taxes and the following two additional conditions hold: Closed Economy (NX= 0) Prices are fixed Derive the values of Y* and i* that satisfies equilibrium conditions in both the goods and money markets simultaneously.
B) Given the following assumptions: Tax function is given as = 0 + 1 Net imports is given as NX = X M M = M0 + m1 Y and X = X0 Price is fixed. 1. Solve for Y* and i* 2. Analyse the multiplier for Y* 3. If there is a change in foreign imports by 1%, what will be the impact on the domestic interest rate? Give the numerical magnitude of the impact for the given values of MPC = 0.8, MPI = 0.3, MTR = 0.3, elasticity of investment with respect to the interest rate = 0.2, elasticity of money demand with respect to income = 0.5, and elasticity of money demand with respect to interest rate = 0.2.
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