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)) …show more content…
When the interest rate is halved, to 50, which is 0.5%, it produces a national income of 38.10 (Two decimal places).
Since we already know the amount that investment changes by, which is 8 (12-4), and now know the amount national income changes by, it means that we can calculate an investment multiplier.
Investment multiplier= ∆Y/ ∆ I
The change in Y= 38.10- 25.4= 12.7
Change in I= 12-4= 8
Investment multiplier= 12.7/ 8= 1.59.
When interest rates are decreased it can lead to an increase in the marginal propensity to consume, therefore the investment multiplier may not be appropriate. However, both of the models show the same change in the national income when the interest rates are halved.
Overall analysing both the open economy multiplier and the investment multiplier halving the interest rates does not change the multiplier, however it is clear that it should cause additional effects, such as an increase in MPC and a decrease in MPS, which will affect the multiplier.
Bibliography
Business Dictionary, 2014. Economic Multiplier. [Online]. [6th January 2015].
Available at:
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)) …show more content…
When the interest rate is halved, to 50, which is 0.5%, it produces a national income of 38.10 (Two decimal places).
Since we already know the amount that investment changes by, which is 8 (12-4), and now know the amount national income changes by, it means that we can calculate an investment multiplier.
Investment multiplier= ∆Y/ ∆ I
The change in Y= 38.10- 25.4= 12.7
Change in I= 12-4= 8
Investment multiplier= 12.7/ 8= 1.59.
When interest rates are decreased it can lead to an increase in the marginal propensity to consume, therefore the investment multiplier may not be appropriate. However, both of the models show the same change in the national income when the interest rates are halved.
Overall analysing both the open economy multiplier and the investment multiplier halving the interest rates does not change the multiplier, however it is clear that it should cause additional effects, such as an increase in MPC and a decrease in MPS, which will affect the multiplier.
Bibliography
Business Dictionary, 2014. Economic Multiplier. [Online]. [6th January 2015].
Available at: