PRINCIPLES OF MACROECONOMICS (LL)W/ACC.
7th Edition
ISBN: 9781264088980
Author: Frank
Publisher: MCG
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Chapter 13, Problem 13.4CC
To determine
Graphically, explain the change in output gap as it rises by 10 units.
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Consider the following intertemporal consumption problem with one good and two periods. The quantity of the good consumed in period 1 and period 2 are q1 and q2. The price of each unit of the good is $1 in both periods. The consumer’s income is I1=10 in the first period and I2=12 in the second period. The consumer can borrow or save money at the interest rate of 50%, that is, r=0.50. The consumer’s utility function is u(q1,q2)= q1q2.
The optimal choice of q1 is
a. 9
b. 10
c. 11
And the consumer will:
d. borrow 1
e. save 1
f. borrow 2
g, save 0
12. Savings decisions
Kevin is a postdoctoral fellow who teaches astrophysics at a university where he earns an annual salary of $80,000. He intends to take the next year
off to focus on writing a new undergraduate physics textbook, so he will not earn any income next year. He is currently deciding how much of this
year's salary he should save for next year. Assume that there are no tax implications associated with the decision, and ignore what happens after next
year. Therefore, next year Kevin will consume whatever he saves this year plus interest, and he is not concerned with the future beyond next year.
The following graph shows Kevin's preferences for consumption this year and next year. Suppose initially Kevin cannot earn interest on the money he
saves.
Use the green line (triangle symbol) to plot Kevin's budget constraint (BC) on the following graph. Then use the black point (plus symbol) to show
his optimum consumption bundle.
Note: Dashed drop lines will automatically extend…
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Chapter 13 Solutions
PRINCIPLES OF MACROECONOMICS (LL)W/ACC.
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- Tom lives in two periods. In the first period, his income is fixed at $50,000; in the second, he gets a 8% raise in his income. He can borrow but cannot save at the market interest rate of 5 percent. Assume the next period consumption is put on the vertical axis). The vertical intercept of his intertemporal budget constraint is: dollars.arrow_forward6. Given the savings function S = (3Y2 +2Y)/ ( Y-1) a) Write the consumption function. b) Find the equilibrium level of income, if the consumption is 100. Please answer both subparts. I will really upvotearrow_forwardUse the graphs to illustrate the effect of a decrease in consumer income expectations on the consumption (C) function and the savings (S) function. Real consumption 500 450 400 350 300 250 200 150 100 50 0 0 50 C = DI с 100 150 200 250 300 350 400 450 500 Real disposable income (DI) Real savings 500 450 400 350 300 250 200 150 100 50 0 -50 -100 -150 0 50 100 150 200 250 300 350 Real disposable income (DI) S 400 450 500arrow_forward
- Suppose that c= a+by, where c= consumption, a = consumption at zero income, b = the slope of the consumption from function, and y = income, a) are c and y positively related or are they negatively related? b) If graphed, would the curve of this equation slope upward or downward? c) What is the value of c if a = 10, b = 50 and y = 200? d) what is the value of y if c = 100, a = 10 and b = 25?arrow_forwardAssume that Kelly is a life cycle consumer and receives incomes of 20, 30, 45 and 0 in her four period life. What is Kelly's marginal propensity to consume out of her new wealth (AC/AW) in the following situations: [Hint: Let AC be the the change in consumption compared to what she would have done before the inheritance changed her wealth AW]. 19. In period 2 following an unexpected inheritance of 10: (a) 0.25; (b) 0.33; (c) 0.75; (d) 1.0; 20. In period 3 following an expected lump sum payment from her trust fund of 15: (a) 0.33; (b) 0.75; (c) 0.45; (d) 0.50; 21. What is her desired optimal consumption in period 3 with the anticipated trust fund gift of 15: (a) 20; (b) 30; (c) 27.50; (d) 22.50; 22. In what period of her working life (Y > 0) would her marginal propensity to consume out of an unexpected inheritance of 10 be the highest: (a) 1; (b) 2; (c) 3; (d) 4;arrow_forward2. The Keynesian and classical views of aggregate supply In the following table, match the macroeconomic assumptions about aggregate supply to the appropriate school of thought. Assumption Classical Keynesian Product prices and production costs are flexible. O O Only an increase in aggregate demand can move an economy out of a recession and back to Natural Real GDP quickly. O O The economy naturally tends toward Natural Real GDP. Grade It Now Save & Continue Continue without savingarrow_forward
- Consider 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_forwardWhich of the following statements is correct? a) From an additional dollar of income the least consumers can spend is 1 cent. b) If from an additional dollar of income there is 0 additional consumption, then MPC is 1. c) If MPC is zero, the multiplier is 1. d) One is a multiplier.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
- The autonomous consumption expenditures and autonomous investment expenditures in an economy are $250 and $350, respectively. It is also observed that individuals spend 90% of their additional income on consumption. Using the information provided above, the aggregate expenditure function for this economy is: (Round your response for the intercept term to the nearest whole number and for the slope term to two decimal places.) The simple multiplier for this economy can be calculated as 10. (Round your response to one decimal place.) The value of the simple multiplier implies that a $200 decrease in the autonomous investment expenditures would lead to a $ in the equilibrium level of actual income. (Round your response to the nearest dollar.) increase AE = 600+ 0.9 Y decreasearrow_forwardOnly Carrow_forwardDemand and Supply model In the notes and lessons, we saw that quantity demanded and quantity supplied may be related by the recurrence relations Pn+1-Pn =α (Dn - Pn), Dn+1-Dn =β (Pn - Dn), where Pn is the level production after n time intervals, Dn is the quantity demanded by the consumer and α and β are proportionality constants. Suppose α=β=k. Which of the following gives the best description of the behaviour of the quantity demanded and level of production when k=2? A. The level of production oscillates with a decreasing amplitude. The quantity demanded also oscillates with a decreasing amplitude. The level of production and quantity demanded diverge from each other as the number time steps n goes to infinity. B. The level of production oscillates with a decreasing amplitude. The quantity demanded also oscillates with a decreasing amplitude. The level of production and quantity demanded reach equilibrium as the number time steps n goes to infinity. C. The level of…arrow_forward
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