A Report On The Equation ' G ' Represents Autonomous Investment '

2106 Words Jan 8th, 2015 null Page
0.53Y=16
Y=16/0.53= 30.19

ii)

In the second we have changed the exogenous investment to the equation’ I= g-hR’. In this model the ‘g’ represents autonomous investment, this value must be either equal or greater than zero. ‘R’ is the interest rate, which is measured in hundredths of 1%. ‘h’ is the sensitivity of investment to a adjustment in the interest rate. We feel that for the UK a reasonable interest rate to start with would be 1%.

‘A rate which is charged or paid for the use of money.’ [Investor Words, 2014].

Y=C+I+G+X-M

Y= a +b(Y-(tY+T*))+ g-hR +G*+X* - (K+ mY)

Y=a+ b(Y-tY)-T*+ g-hR +G*+X*-k-mY

Y= a+b(1-t)Y -mY –T*+ g-hR +G*+X*-k

Y- b(1-t)Y+mY= a+g-hR+G*+X*-T*-k

(1-(b-m)(1-t))= a+g-hR+G*+X*-T*-k

Y= a+g-hR+G*+X*-T*-k/((1-(b-m)(1-t))

From this we can see that we should use the same multiplier as in part one.

Multiplier= 1/[1-(b-m)(1-t))

Values of each variable include

‘g’= 20
‘h’= 0.16
‘R’= 100

I= g- hR
I= 20 –(0.16*100)

We used Excel to change the exogenous level of investment to the new equation to see what the affect of halving the interest rate would be.

The table below shows the formulas used to work this out.

C= 4+0.65(Y-T)
I= 20- (0.16*100)
G+X=16
M= 5 +0.15Y
T= 0.2Y +3

Interest rate= 1%

Multiplier= 1.67

The is the same as the original model in part i) as investment has been kept the same (4) and the exogenous variables come to (16), meaning that they total (20), as shown previously. The national income is 25.40, which is the…

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