Consider a Closed Economy Without Government. Assume that a Constant of Profit (Π): Macroeconomics and Public Policy Assignment, UCD,
| University | University College Dublin (UCD) |
| Subject | Macroeconomics and Public Policy |
Questions for Macroeconomics and Public Policy Assignment
Question 1: Consider a closed economy without government. Assume that a constant of profit (Π) is saved and that no wage (𝑊) is saved.
Using the Keynesian income-expenditure accounting, derive the so-called ‘profit multiplier’ and explain the main determinant of the size of the profit multiplier.
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Question 2: Now introduce the government sector in the above model and let 𝐺 and 𝑇 represent government expenditure and revenues respectively.
Derive the profit multiplier for this case and discuss the relationship between fiscal deficit (higher expenditure over revenues) and the level of profits in the economy.
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