Question

1.     Change in GDP: as affected by Fiscal Policy as applied to the Business Cycle Keynesian Multiplier Model. (please explain all in microsoft word)

Answer 1

in keynesian model equilibirium condition is

Y= C + I + G

Y= C₀ + c(Y-t) + I₀ + G₀

Y= 1/1-c(1-t) + C₀ + I₀ + G₀

1/1-c(1-t) is the keynesian multiplier

C₀ + I₀ + G₀ is the autonomous spending.

fiscal policy is use by the government which affect the real GDP(Y). fiscal policy are of two types i.e expansionary policy and contractionary policy. suppose government introduce expansionary policy in the form of reduction in tax, so, reduction in tax (t) increases the disposable income (Y-t) which increases the consumption. as a result, GDP (Y) increases.

suppose government introduce contractionary policy in the form of reduction in goverment expenditure, so, reduction in government expenditure (G₀ ) decreases G₀ which decreases real GDP(Y)