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# homework5Spring2008answers - Economics 302 Spring 2008...

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Economics 302 Spring 2008 Homework #5 Homework will be graded for content as well as neatness, sloppy or illegible work will not receive full credit. This homework requires the use of Microsoft Excel. 1. Keynesian Cross Consider a closed economy with consumption given by the following equation. ( 29 2 100 ( ) 3 C Y T = + - In addition, suppose that planned investment expenditure is 300 and that the government runs a balanced budget with 200 in government spending. Use the Keynesian cross as a starting point to answer the following questions. a. If Y is 1,100, what is planned expenditure? What is the change in inventory level? Given your answer to the last question, would you expect equilibrium Y be higher or lower than 1,100? If you expect equilibrium Y to be different, explain the mechanism by which you would expect Y to change in this economy. ( 29 ( 29 E = C + I + G 2 = 100 + (Y -T)+ 300 + 200 3 2 = 600 + (1,100 - 200) 3 = 600 + 600 = 1,200 The change in inventory level is the output less planned expenditure, this is equal to Y – E which is equal to 1,100 – 1,200 = -100. As inventory levels are decreasing we expect that the equilibrium level of output should be higher than 1,100. Firms will take the change in inventory as a sign to hire more workers and increase production, increasing the level of output and moving toward the equilibrium level. b. What is equilibrium Y? ( 29 ( 29 ( 29 ( 29 ( 29 ( 29 2 1 2 2 c Y = E = C + I + G 2 = 100 + (Y -T)+ 300 + 200 3 2 = 600 + (Y - 200) 3 2 = 466 + Y 3 3 2 Y - Y = Y = 466 3 3 3 Y = 3* 466 = 1,400 3 c. What are the equilibrium levels of consumption, private saving, public saving, and national saving, based on the equilibrium level of output you just found?

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( 29 ( 29 ( 29 (Balanced budget) = + G P P G 2 C = 100 + (Y -T) 3 2 = 100 + (1,400 - 200) 3 2 = 100 + (1,200) = 900 3 S = T -G = 0 S = Y - C -T = 1,400 - 900 - 200 = 300 NS = I = 300 S S = 300 d. Compared to the answer you found in part (b), what is the new equilibrium income when Investment is reduced by 50? What is the Keynesian multiplier for investment spending?
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