Exercise 2

1
Question 6 (exercises to chapter 2 in IDM)
Model
Ct ß0 ß1 INCt aCt-1 et
INCt Ct Jt
To find the final solution for INCt, insert for
Ct and Ct-1 in the first equation
1
INCt
ß0 Jt aJt-1 aINCt-1 et
1 ß1
Main points
- The impact multiplier in this model equals the
standard keynesian multiplier in the static model
- The long-run multiplier will be larger than the
impact multiplier because of the feed-back effect
through consumption (a gt 0)