Question

Here is another set of equations describing an economy:

C = 14,400 + 0.5(Y-T) – 40,000r

IP = 8000 – 20,000r

G = 7000

NX = -1,800

T = 8000

Y* = 40,000

a. Find a numerical equation relating planned aggregate expenditure
to output and to the real interest rate. [i.e. write down the PAE
equation]

b. At what value should the Fed set the real interest rate to eliminate any output gap? (Hint: Set output Y equal to the value of potential output given above in the equation you found in part (a). Then solve for the real interest rate that also sets planned aggregate expenditure equal to potential output.)

Answer #1

An economy is described by the following equation:
C = 1600 + 0.6 (Y - T) - 2000 r
IP = 2500 - 1000 r
G = 2000
T = 1500
C is the consumption, IP is the planned investment, G
is the government spending, T is the net taxes, r is the real
interest rate.
This economy is a closed economy meaning that the Net Exports
are always 0, i.e. NX = 0.
a. Find an equation relating the...

An economy is described by the following equations:
C = 100 + 0.75(Y – T)
IP = 50
G = 150
NX = 20
T = 40
What is the marginal propensity to consume (MPC) in this
economy?
Find the autonomous expenditure (the part of PAE that does not
depend on Y)
What is the equilibrium level of output?
Assume that the economy is NOT in equilibrium, and the level of
output is Y=1,200. How much is planned spending (PAE)?...

Consider the following model of an open economy:
C = 14000 + 0.9YD -
45000i
YD = Y - T
I = 7000 - 20000i
M = 0
G = 7800
X = 1800
where Y is income, C is consumption,
YD is disposable income, i is the real
interest rate,G is government spending, T is tax,
I is investment, M is imports, and X is
exports.
What is the marginal propensity to save? (1
MARK)
Explain the intuition behind...

3. The components of planned aggregate spending in a certain
economy are given by Consumption Function: C = 800 + 0.75(Y - T) –
2000r
Planned Investment: Ip = 400–3000r
Government Revenue and Spending: T = 300 and G = 450 Net Export: NX
= 75
where r is the real interest rate (For example, r = 0.01 means
that the real interest rate is 1 percent). (1) Find the level of
public saving.
(2) Suppose that the real interest...

C = 3,500 + 0.5(Y - T)
I = I0 = 1,000
G = G0 = 2,000
X = 600
IM = 400
T = T0 = 2,000
Yp = 10,000
Note: Keep as much precision as possible during
your calculations. Your final answer should be accurate to at least
two decimal places.
a) Find autonomous expenditure.
Autonomous Expenditure = $0
b) Find the multiplier.
Multiplier = 0
c) Find short-run equilibrium output.
Short-run Equilibrium Output = $0
d) Find...

The
components of planned aggregate spending in a certain economy are
given by Consumption Function: C = 800 + 0.75(Y - T) – 2000r
Planned Investment: I p = 400–3000r Government Revenue and
Spending: T = 300 and G = 450 Net Export: NX = 75 where r is the
real interest rate (For example, r = 0.01 means that the real
interest rate is 1 percent). (1) Find the level of public saving.
(2) Suppose that the real interest...

Assume the following equations summarize the structure of an
economy.
C = Ca + 0.7(Y - T)
Ca = 1,000 - 10r
T = 100 + 0.15Y
(M/P)d = 0.3Y - 20r
MS/P = 3,000
Ip = 3,500 - 20r
G = 3,000
NX = 2,000 - 0.4Y
a. Calculate the equilibrium real output (Y) and (r ).
b. Given the above information, compute the new equilibrium real
output if government spending increases by 300.
c. What is the amount...

An economy is initially described by the following
equations:
C = 500 + 0.75(Y - T); I = 1000 - 50r; M/P = Y - 200r;
G = 1000; T = 1000; M = 6000; P = 2;
where Y is income, C is consumption, I is investment, G is
government spending, T is taxes, r is the
real interest rate, M is the money supply, and P is the price
level.
a. Derive the IS equation and the LM...

An economy is described by the following equations:
C
= 1,500 + 0.9 (Y – T)
I
p
= 1000
G
= 1,500
NX
= 100
T
= 1,500
Y*
= 8,800
The multiplier for this economy is 10.
Find the effect on short-run equilibrium output of:
a. An increase in government purchases by 100 from 1,500 to
1,600.
Instruction: Enter your response as an integer
value.
Short-run equilibrium output will increase to .
b. A decrease in tax collections...

In a closed economy, the consumption function is:
c = 1.15 + 0.75(y - t) billions of 1992 dollars.
The tax function is:
t = 0.1y + 0.1 billions of 1992 dollars.
Planned investment is $1 billion and planned government
expenditures
are $1.5 billion. Calculate:
The equilibrium level of real GDP.
2. Consumer expenditure
3. Saving
4. The investment multiplier
5. The government budget deficit
6. The leakages from and injections into the circular flow of
income and
expenditure. Do...

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