aps4 - Economics 102 Introductory Macroeconomics Spring...

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1. Consider the following information about a hypothetical open economy. a) Recall that AE d = C + I d + G + (X - M) and the equilibrium condition: AE d (Y * )=Y * . Hence the equilibrium level of national income, Y * is $600 billion , since at this level income will equal aggregate desired expenditure. b) The marginal propensity to consume out of Y is mpc= C/ Y = 0.8 c) The marginal propensity to invest out of Y is mpi = I/ Y = 0 d) The marginal propensity to export out of Y mpx = X/ Y = 0 e) The marginal propensity to import of Y mpm = M/ Y = 0 f) Substituting the previous values we obtain that the investment multiplier is: K I = 1/(1-mpc-mpi-mpx+mpm) = 1/(1-0.8) = 5 g) The investment multiplier tells us that for each exogenous increase in the level of planned investment by $1.00 we will generate a $5.00 increase in the equilibrium level of national income. h) If planned investment exogenously increased by $1 billion then the equilibrium level of national income would rise by $5 billion (i.e. 1 billion times 5), ceteris paribus. 2. Suppose that the following set of equations describes ALL the relevant information about the Czech Republic. Consumption function: C = 2000 + .4Yd (where Yd = disposable income) Planned Investment function: I = 800 Government expenditures function: G = 900 Economics 102 Introductory Macroeconomics Spring 2006, Professor J. Wissink Problem Set 4 - ANSWERS Y C Iplanned G Taxes Exports
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