Question

An economy is described by the following equations:

C = 100 + 0.75(Y – T)

I^{P} = 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)?

Assume that the economy is NOT in equilibrium, and the level of output is Y=1,200. Should firms increase or decrease production in order to move towards the equilibrium?

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...

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...

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 described by the following equations:
C = c0+ c1YD
YD= Y – T
I = b0+ b1Y
G = G (autonomous)
T = T (autonomous)
Suppose that consumers decide to consume less (and therefore
save more) for any given amount of disposable income. Specifically,
assume that consumer confidence (c1)falls. What will
happen to output, investment, public saving and consumption?

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...

Consider an economy in the short-run described by the following
equations:
Z = C + I + G
G = 500
T = 500
C = 250 + 0.75(Y – T)
I = 625
a. What is the equilibrium condition that allows us to solve for
Y. Find Y. Compute private saving, public saving and total/national
saving at this level of Y.
b. What is the value of the marginal propensity to consume? What
is the value of the expenditure...

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...

1. Suppose the United States economy is represented by the
following equations: Z= C + I + G , C = 500 + 0.5Yd, Yd = Y − T T =
600, I = 300, G = 2000, Where, Z is demand for goods and services,
Yd is disposable income, T is taxes, I is investment and G is
government spending. Y is income/production. (a) Assume that the
economy is in equilibrium. What does it mean in terms of the...

The MPC for a closed economy is 0.75. Autonomous
consumption is $500, investment is $300, and government spending is
$400.
a) What is the equilibrium
level of real GDP?
b) If business increases
planned investment expenditure by 300 to 400, what is the new
equilibrium real GDP?
c) What is the slope of the AE
function in this economy and the value of the
multiplier?

Consider an economy described by the following
equations:
Y=C+I+G+NX,
Y=8,000
G=2,500
T=2,000
C=500 +
0.75(Y−T)
I=900−50r
NX=1,500−250ϵ
r=r∗=8.
a.
In this economy, solve for private saving, public saving, national
saving, investment, the trade balance, and the equilibrium exchange
rate.
b.
Suppose now that G is cut to 2,000. Solve for private saving,
public saving, national saving, investment, the trade balance, and
the equilibrium exchange rate. Explain what you find.
c.
Now suppose that the world interest rate falls from 8...

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