discussionsectionhandout10answersfall2007

discussionsectionhandout10answersfall2007 - Econ 102 Fall...

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Econ 102: Fall 2007 Discussion Section Handout #10 Question #1 The economy of Blahnik is defined by the following equations in the Keynesian model. C = consumption = 500 + 0.8(Y-T) I = autonomous investment = 600 G = government spending = 700 + 0.6T X = autonomous exports = 400 M = imports = 200 + 0.2(Y-T) T = net taxes = 0.1Y (Note that the coefficient 0.2 in our import function is known as the marginal propensity to import , an important idea in Keynesian models which is very similar to the marginal propensity to consume.) a) Write out the savings function in terms of aggregate income, and find the MPC and MPS. We first identify the marginal propensities to consume and save. We see from our consumption function that the MPC = 0.8, and MPS = 1 – MPC = 0.2. We also know that if the consumption function is written as C = a + b(Y-T), then our savings function in terms of disposable income is given by Sp = -a + (1-b)(Y-T), so Sp = -500 + 0.2(Y-T). As T = 0.1Y, we plug this into our savings function to obtain Sp = -500 + 0.2(Y-0.1Y) = -500 + 0.2(0.9Y) = -500 + .18Y, in terms of aggregate income.
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