This preview shows pages 1–2. Sign up to view the full content.
Economics 302
Name __________________________________
Answers to Quiz #4 MW Lecture
4/30/08
Discussion Section _______________________
PLEASE PLACE A BOX AROUND EACH OF YOUR ANSWERS ON THIS
QUIZ. WORK MUST BE SHOWN FOR ALL CALCULATIONS.
Use the IS/LM Model to answer the following set of questions. You are given the
following information about a closed economy. Assume that net taxes and government
spending are both constant and exogenously given to you.
Real GDP
Net Taxes
Government
Spending
Investment
Spending
Consumption
Spending
Private
Saving
8,000
200
500
260
7240
560
9,000
200
500
460
8040
760
10,000
200
500
660
8840
960
In addition, you are told that the following information:
Money Supply = M = 2000
Aggregate Price Level = P = 1
Money Demand = 2000 + 2Y  2900r
Investment Demand = I = I(r) = when investment is equal to 500 the interest rate is 5%
and for each percentage increase in the interest rate, investment decreases by 100 (the
investment demand equation is linear with respect to the interest rate) [Hint: in writing
the investment demand equation the interest rate is entered as a whole number and not a
percentage. For example, if the interest rate is 5%, then in the equation r would have a
value equal to "5".]
1. (.25 points) Fill in the missing column labeled "Private Saving" in the above table.
2. (.25 points) The MPC is constant in this economy as is autonomous consumption.
Derive the consumption function equation with respect to disposable income (Y  T) for
this economy based on all the information you have been given.
To find the consumption function you need to calculate the MPC and "a". It is helpful to
create a table showing values of disposable income and the consumption level that
occurs at each level of disposable income.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
 Spring '07
 GOLD
 Economics, Macroeconomics

Click to edit the document details