1)
A. Suppose we invent a new theory for government expenditure so that instead of
government expenditure being exogenous, it is given by :
$G = g_0 + g_1Y$. That is, government expenditure now has an exogenous part given by $g_0$
and an endogenous part given by $g_1Y$.
Suppose we continue to assume that the consumption function is given by
: $C = c_0 + c_1Y_D$ and that taxes are given by : $T = t_0 + t_1Y$.
By using the method to find equilibrium GDP, show that
: $Y_E = \frac{1}{1 - (c_1(1 - t_1)) - g_1}(c_0 - c_1t_0 + I + g_0)$.
B. Explain, in words, why the multiplier in our new model is larger than was the case
when government expenditure was exogenous.
