First Test Solutions

3 7. (1 point) Th ere is a $1500 m recessionary gap in Z-Y space; the MPS=0.25; the Y tax rate, t1 =35%. Cet. par., th e required t. policy is approximately: a.+ $769 m b. - $325 m (c') - $1025 m ct. - $769 m e. none of the above (6 points) Show work. In Z-Y space graph indicate the gap; show initial and new equilibria. Provide the/11/1 macro policy name. Th,- "::, 13 XPAN5l0/\JA- ~ t1SCl'H- ?oUlcJ v\q : -¥--I--...:.-__!--- 'i 'lo 't~ 8. (1 point) An "automatic stabilizer" refers to a. the fact that the G multiplier is always greater than the absolute value of the lo multiplier. b. an excess supply of money being offset by an excess supply of bonds. c. the discipline imposed on the Federal Reserve by the zero lower bound. @the fact that income taxes (t1) mean a given shock will cause a smaller change in equilibrium Y. e. none of the above (2 points) Explain your choice: \Jt,C..t'l- ""''>lt~\,u . , -l:::, . l_J_) 61- l-v ;-\-.,, ~"'~ ~y.cs. c, : .6 'i - I L'\.6 l I w1'f\,,00" ' . b 'i 1---c' I -,C, -t ,(1 -Cl ) A 1 · vcf"'\ S!ruc-lt, lu-c /:::.J, ha.,S 5~ e~cJ-tv-- 'i t"C-- 3 {_,I 9. (1 point) The Australian government has adopted a balanced-budget amendment; its MPC is 0.65 and its net taxes are T=t,. If a spending bill is approved in which lo falls by $550 m then the ultimate change in eqm Y is a. - $1021.43 m and its government budget deficit (GBD) will fall. b. + $1021.43 m and its GBD will rise. c. + $1571.43 m and its GBD will not change. @- $550 m and its GBD will not change. e. + $550 m and its GBD will rise. f. none of the above (3 points) Show your calculations, formula, and provide appropriate name(s): 13B M : ~\ / l ., ~c) b 1 t~ 6-t-o I f36M 6 (, E, D /> G -6, Lo ::: 0 -5)0

PART JI. Problems (15 POINTS): Consider the following ma croeco nom y in the Short Run ; a ll amounts are in millions of dollars: a. (5 points) Ca lculate eqm Y. C = 450 + 0.7 Yo I = 1500 G = 850 T = 300 6 E'1f""' 'i "' (A,+ ..,Jh,.<fk. '-I::. z: =) 1 = C +-I_+ Ci- ~-= 4~0 -t-.1(Y-3ao') +- /s-oo +- f~o _____ _ , 3 = 18ao -.;:110 =';> Y --= .2 :;o =) [ 'i <:?633. 33 ) b. (4 points) Prove that the appropriate relationship between I and various types of Savings holds. 1 lsP,.;v+- /SCO-::: 5P~V-1-T-{f-~ /5'CO-= 300-?SD p~: 'S •"" 0 'f !)-c Si'""~ 'f D-45a-.1Yj) (5 """-=,} o!]jJ 5PV_ -i--/50 +. 3 ( )5£,3 3 - 300) {_;:, oov = :::lo-':,7:> J c. (6 points) What is meant by the "Paradox of Thrift" (POT)? Prove -- by making the appropriate calculations -- that the "POT" holds in this economy if c 0 falls by $350 m. p_ 0-1: Vi'r+vov~ i'~ ~n /f"\.d;v1'Jva..,( 50..1..lCS lvd- a: CvC{jCy...c_ a.~pt;' -fr> j 5 a.v1ry 5PnV NO/:::, f.l/1~ '-( J,,, L,vh, -G ~ --f,u~fv-dcs a H-c.rnpf h> j S:a vij , d Ci...,..--. '-I I h- l . -er 1b cY' + . -' I 0 "f _ ,,.~ ;; §1 :c _j__ -3) D '1 " t 3 so) C 3, 3 3) - J-,.-Cl -35D · 3 .? , __ D '1 -//b~ '--l;'-:/-l-/-b1- p, I (! (!! ,,e,v-J 1 / I /, --;\.../ 1 )~ S t-1 :::- /00 -+ .. 3 4L:,1-3oj S PA'CA--+c = yJ) -c tEQ -,-, 7 , 0 F:, l r-.,l <A.J 1 -i_ v , : ~ '""-;;, ;;Jaso ) /h 5 P;1 -v NO~ I_~