# Homework 6 - Points Awarded Points Missed Percentage 100.0...

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Points Awarded 100.0 0 Points Missed 0.00 Percentage 100% 1. Consider the following model i) C = 1500 + mpc (Y - tY) ii) I = 800 iii) G = 500 iv) X - M = 500 - mpi (Y) where: t = the (flat) tax rate mpc = the marginal propensity to consume mpi = the marginal propensity to import suppose mpc = .80, t = .25, mpi = .2 Given the information above, solve for the equilibrium output: A) Y* = 3300 B) Y* = 5500 C) Y* = 1500 D) Y* = 1800 Feedback: Y = C + I + G + X-M Y = 1500 + mpc(1-t)Y + 800 + 500 + 500 - mpi Y Y - mpc(1-t)Y + mpiY = 3300 Y [ 1 - mpc(1-t) + mpi ] = 3300 Y = 1 / [1 - mpc(1-t) + mpi] X 3300 Y = 1 / [1 - .8(1-.25) + .2] X 3300 Y = 1.66667 X 3300 Y = 5500 Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): B 2. We know that the formula for the (government) spending multiplier is 1/(1-[mpc(1-t) - mpi]). The value of the government spending multiplier in this problem is: Round to 2 decimal places.

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Y = C + I + G + X-M Y = 1500 + .mpc(1-t)Y + 800 + 500 + 500 - mpi Y Y - mpc(1-t)Y + mpiY = 3300 Y [ 1 - mpc(1-t) + mpi ] = 3300 Y = 1 / [1 - mpc(1-t) + mpi] X 3300 Y = 1 / [1 - .8(1-.25) + .2] X 3300 Y = 1.66667 X 3300 Y = 5500 Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): D 3. When we discussed the multiplier we discussed the impact effect. For example, suppose that G increases by 100 to 600 and we assume, as we often do, that firms match the increase in demand by increasing Y by 100. In round two, this is an increase in income of 100 to consumers . We will trace out exactly where this 100 increase in income goes in the second round . Recall, there are three leakages to address (via taxes, imports and savings). Given that t=.25, we know that .25 of every dollar increase in gross income is a leakage due to taxes. Since the increase in income is \$100, we know the leakage due to taxes is: Table for Individual Question Feedback Points Earned: 3.0/3.0
Correct Answer(s): A 4. Given that mpi=.2, we know that .2 of every dollar increase in gross income is a leakage due to imports. Since the increase in income is \$100, we know the leakage due to imports is: Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): C

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