# ps4 - Economics 102 Introductory Macroeconomics Spring 2006...

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1. Consider the following information about a hypothetical open economy. a) What is the equilibrium level of national income, Y*? b) What is the marginal propensity to consume out of Y (mpc)? c) What is the marginal propensity to invest out of Y (mpi)? d) What is the marginal propensity to export out of Y (mpx)? e) What is the marginal propensity to import of Y (mpm)? f) In this economy the general formula for the investment multiplier is: K I’ = 1/(1-mpc-mpi-mpx+mpm), what is the numerical value of the multiplier given your answers above? g) What does the multiplier actually tell us? h) What would happen to the equilibrium level of national income if planned investment exogenously increased by \$1 Billion? 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 Tax function: T = 700 Export function: EX = .2Y Import function: IM = 100+.1Y The full employment level of national income: Y Full Employment = 7,000.

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