ProblemsExercise 1Suppose a closed economy is represented by the following equations:Z= C+I+GC= co + C1x YDYD = Y-TT=100I=0.2x Y-5000x iG=150where Cis private consumption, I is investment, i is the interest rate set by the central bank; G isgovernment spending, Y is income, Ypis disposable income and T represents taxes. Assume that co=250, i=2% (remember 2%=0.02), and c1 = 0.6.а.i.Given the above equations and variables, calculate the equilibrium level of output.ii.What is the multiplier for this economy?b. Now, assume that I is 0.1× Y-5000× i. Also, assume that co, C1, G, i and T remain unchanged:i.What is the new equilibrium level of output?How much does income change as a result of the change in ?What is the multiplier for this economy after the change in ?ii.ii.iv.What is the new level of consumption after the change in ?c. Assuming the same change as in (b), but letting G, i and T vary, which policies can thegovernment do to achieve the same level of output as in item (a)?d. Discuss the benefits and drawbacks of each of the possible policies available in (c).

Co = 250 C1 = 0.6 i = 0.02 G = 150 I = 0.2Y - 5000i T = 100

Exercise 1 Suppose a closed economy is represented by the following equations: Z= C+I+G C= co + C1x YD YD = Y-T T=100 I=0.2x Y-5000× i G=150 where C is private consumption, I is investment, i is the interest rate set by the central bank; G is government spending, Y is income, Yo is disposable income and T represents taxes. Assume that co =250, i=2% (remember 2%=0.02), and c1= 0.6. а. Given the above equations and variables, calculate the equilibrium level of output. What is the multiplier for this economy? i. ii. b. Now, assume that I is 0.1× Y-5000× i. Also, assume that co, C1, G, i and T remain unchanged: i. What is the new equilibrium level of output? ii. How much does income change as a result of the change in P? ii. What is the multiplier for this economy after the change in ? iv. What is the new level of consumption after the change in IR c. Assuming the same change as in (b), but letting G, i and T vary, which policies can the government do to achieve the same level of output as in item (a)? d. Discuss the benefits and drawbacks of each of the possible policies available in (c).

Exercise 1 Suppose a closed economy is represented by the following equations: Z= C+I+G C= co + C1x YD YD = Y-T T=100 I=0.2x Y-5000× i G=150 where C is private consumption, I is investment, i is the interest rate set by the central bank; G is government spending, Y is income, Yo is disposable income and T represents taxes. Assume that co =250, i=2% (remember 2%=0.02), and c1= 0.6. а. Given the above equations and variables, calculate the equilibrium level of output. What is the multiplier for this economy? i. ii. b. Now, assume that I is 0.1× Y-5000× i. Also, assume that co, C1, G, i and T remain unchanged: i. What is the new equilibrium level of output? ii. How much does income change as a result of the change in P? ii. What is the multiplier for this economy after the change in ? iv. What is the new level of consumption after the change in IR c. Assuming the same change as in (b), but letting G, i and T vary, which policies can the government do to achieve the same level of output as in item (a)? d. Discuss the benefits and drawbacks of each of the possible policies available in (c).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Problems
Exercise 1
Suppose a closed economy is represented by the following equations:
Z= C+I+G
C= co + C1x YD
YD = Y-T
T=100
I=0.2x Y-5000x i
G=150
where Cis private consumption, I is investment, i is the interest rate set by the central bank; G is
government spending, Y is income, Ypis disposable income and T represents taxes. Assume that co
=250, i=2% (remember 2%=0.02), and c1 = 0.6.
а.
i.
Given the above equations and variables, calculate the equilibrium level of output.
ii.
What is the multiplier for this economy?
b. Now, assume that I is 0.1× Y-5000× i. Also, assume that co, C1, G, i and T remain unchanged:
i.
What is the new equilibrium level of output?
How much does income change as a result of the change in ?
What is the multiplier for this economy after the change in ?
ii.
ii.
iv.
What is the new level of consumption after the change in ?
c. Assuming the same change as in (b), but letting G, i and T vary, which policies can the
government do to achieve the same level of output as in item (a)?
d. Discuss the benefits and drawbacks of each of the possible policies available in (c).

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