PRINCIPLES OF MACROECONOMICS (LL)W/ACC.
7th Edition
ISBN: 9781264088980
Author: Frank
Publisher: MCG
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Chapter 13, Problem 13.1CC
To determine
Construct a table using the given consumption functions.
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The following are exogenous (not directly affected by income):
G = 9
I = 14
X = M = 0
The consumption function is:
C = k + cY, where k = 8, c = 0.6
at the point where this economy is in equilibrium what is the total level of withdrawals? Give the number to ONE decimal place.
Q2. Suppose the U.S. economy is represented by the following equations.
Z=C+I+G
C = 300+.5 YD
T = 400
I = 200
YD = Y-T G = 1000
(a) Given the above variables, calculate the equilibrium level of output (Y).
(b) Using the graph below, illustrate the equilibrium level of output for the economy.
Aggregate Demand (Z)
450
(c) Now assume that consumer confidence increases causing an increase in autonomous
consumption from 300 to 400. What is the new equilibrium level of output?
(d) How much does income change as a result of this event? What is the multiplier for this
economy?
(e) Graphically illustrate (in the above graph) the effects of the change in autonomous
consumption on the aggregate demand line and equilibrium Y. Clearly indicate in your
graph the initial and final equilibrium levels of output.
(f) Briefly explain why this increase in output is greater than the initial increase in autonomous
consumption.
Imagine this economy has a 10% tax on income.
The following are exogenous (not directly affected by income):
G = 11
I = 4
X = M = 0
The consumption function is:
C = k + cY, where k = 3, c = 0.8
Now we have to take that tax into account. Here is a way to think about it:
Look at the consumption function. It says if you give me one more dollar of income I will spend 80 cents of it (mpc = 0.8). BUT I can only spend what I receive. I can only spend my after-tax or disposable income.
With a 10% tax, I don't receive Y I receive 90% of Y or Y*(1-t) where t = 10% or 0.1.
Let's define disposable income as Yd where Yd = Y*(1-t).
Therefore we restate our consumption function as C = k + cYd
Now we have, in this case, C = k + cYd or C = 3 + 0.8Yd or C = 3 + 0.8*(Y*[1-0.1]) or C = 3 + 0.72Y.
Now what is the equilibrium GDP?
Give the answer to ONE decimal place.
Chapter 13 Solutions
PRINCIPLES OF MACROECONOMICS (LL)W/ACC.
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- The following are exogenous (not directly affected by income): G = 11 I = 4 X = M = 0 The consumption function is: C = k + cY, where k = 3, c = 0.8 Now we have to take that tax into account. Here is a way to think about it: Look at the consumption function. It says if you give me one more dollar of income I will spend 80 cents of it (mpc = 0.8). BUT I can only spend what I receive. I can only spend my after-tax or disposable income. With a 10% tax, I don't receive Y I receive 90% of Y or Y*(1-t) where t = 10% or 0.1. Let's define disposable income as Yd where Yd = Y*(1-t). Therefore we restate our consumption function as C = k + cYd Now we have, in this case, C = k + cYd or C = 3 + 0.8Yd or C = 3 + 0.8*(Y*[1-0.1]) or C = 3 + 0.72Y. Now what is the equilibrium GDP?arrow_forwardConsider the following demand components: Consumption described as a following: 120 million USD as an autonomous level of consumption plus 80% of disposable income spends on consumption. I = 50 G=10 T= 25 Assuming goods market equilibrium, show equilibrium level of output in this economy: How much output increase, if G increase from 10 to 20, show your calculations:arrow_forwardTrue or False? In the long-run general equilibrium, MPK = MPL.arrow_forward
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- Suppose that the components of planned spending in an economy are C=500 +0.8(Y-T), I=1500, G=2000, X=0, T=0.25Y, where t is the fraction of income paid in taxes (the tax rate). As we will see in this problem, a tax system of this sort serves as an automatic stabiliser, because taxes collected automatically fall when incomes fall.a)Find a short-run equilibrium output in this economy. b)Calculate the multiplier. c)Explain how reducing the size of the multiplier helps to stabilise the economy, holding constant the typical size of fluctuations in the components of exogenous expenditure.arrow_forwardConsider an economy that is characterized by the following equations: C= 400 + 0.5 Yd I = 700 - 4000i + 0.1y G= 200 T= 200 (M/P)d - = 0.75Y - 7500€ (MP)== 600 What is the equilibrium consumption (C)?arrow_forwardWhen the economy is out of general equilibrium, which of the three curves (FE, IS, LM) shifts to return the economy to general equilibrium? What causes this curve to shift?arrow_forward
- Q1: There are two equations for macroeconomic equilibrium in an economy. State them. Show (mathematically) that Savings equals Investment when expenditure equals income. What type of economy would you have when exports equal imports? What happens to the savings-investment relationship if exports are not equal to imports? [This can be greater than or less than]. [Hint: See video lecture on Open Economy Macroeconomics]. Note: Ensure to write out full meanings when you use abbreviations or short forms. This is key to getting full marks.arrow_forwardQuestion 3: Suppose you have the following information from a closed economy: C = 200+ 0.25 YD I = 150+ 0.25Y - 1000i T = 200 G = 250 ī= 0.05 a. Derive the IS relation. (Hint: The IS relation represents an equilibrium in the goods market, where Z=Y, use this t with an equation with (Y) on the left hand side, and (i) on the right hand side) b. Is this an economy where the CB sets the money supply (exogenous) or sets the interest (endogenous)? How would you represent the LM relation in equations? c. What is the equilibrium level of income when the interest rate is 5%?arrow_forwardConsider the following demand components: Consumption described as a following: 100 million USD as an autonomous level of consumption plus 95% of disposable income spends on consumption. I = 30 G=15 T= 20 (a)Assuming goods market equilibrium, show equilibrium level of output in this economy. (b)How much output increase, if G increase from 15 to 20, show your calculations.arrow_forward
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