answertohomework5spring2007 - Economics 302 Spring 2007...

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Economics 302 Spring 2007 Homework #5 Homework will be graded for content as well as neatness. Sloppy or illegible work will not receive full credit. 1. Consider a closed economy with consumption given by the equation C=200+2/3(Y- T). In addition, suppose that planned investment expenditure is 300 and the government runs a balanced budget with government spending equal to 300. Use your understanding of the Keynesian cross as a starting point to answer the following questions. a. If Y is 1,500, what is planned expenditure? What is inventory accumulation or decumulation? Given your answer to the last question, would you expect equilibrium Y be higher or lower than 1,500? If you expect equilibrium Y to be different, explain the mechanism by which you would expect Y to change in this economy. Planned expenditure is 1,600. Inventory deculmulation is 100. Equilibrium Y should be higher than 1,500. Finally, since planned expenditure is greater than actual production, firms must draw down existing inventories in order to meet demand. They will respond to this by hiring more workers and producing more (thus driving Y up towards the equilibrium level). b. What is equilibrium Y? To solve for equilibrium Y, set Y equal to planned expenditure (as a function of Y) then solve for Y. Equilibrium Y is 1,800. c. What are equilibrium consumption, private savings, public savings, and national savings? [Hint: first solve for equilibrium consumption, then use the definitions that you
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answertohomework5spring2007 - Economics 302 Spring 2007...

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