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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.

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