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A simple Keynesian income determination model of an open economy is described by the following equation
AE = C + I + G + X - M, where
C = C + bYdYd = Y - TT = T + tYI = IG = GX = XM = mY
(a) Derive, from first principles, the equilibrium level of income. Sketch the equilibrium position using a well-labelled Keynesian cross diagram.
(b) Explain the Keynesian expenditure multiplier. Derive the formula for the multiplier in this model.
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