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Exercise 4: Multipliers

Consider a keynesian economy, where MPC = 0.8. Derive the effects of the following shocks on the income, dis-

posable income, consumption, private savings, government savings and social savings!

a) The government increases its purchases by 200 units. Use also a graph to show the effects!

b) The government increases taxes by 200 units. Use also a graph to show the effects!

c) The government increases its purchases by 200 units and nances it with a 200-units increase in taxes. Use

also a graph to show the effects!