Reference no: EM132512216

Although we usually assume for the Keynesian cross that government spendings are a fixed amount, mostcountries adjust their spendings automatically with national income. Let's represent this scenario by writing the government spending as

G=G+g

Ywhere G and g are parameters of the government spending. The parameter g represents the marginal change in spending with income: if income rises by $1, G rise by $g×1.

Moreover, not to create large budget deficits governments increase the taxes when government spendingincreases. Let's represent this fiscal fiscal relationship by writing tax revenue as

T=T+tG

where T and t are parameters. The parameter t is the marginal tax rate: if government spending rises by $1, taxes rise by $t×1. Derive the government spending multiplier under this setup, i.e. derive ?Y /?G.