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420worksheet15ans - ECON 420 Worksheet 15 1. In the...

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ECON 420 Worksheet 15 1. In the Keynesian cross, assume that the consumption function is given by C = 100 + 0.90*(Y-T) Planned investment is 100; government purchases and taxes are both 100. a. Calculate equilibrium level of income? Calculate C and S. Y=100+0.90*(Y-100)+100+100 0.10Y=210 Y=2100 C=100+0.90*(2100-100)=100+1800 = 1900 S=2100-1900-100=100 b. If government purchases increase by 50 what is the new equilibrium income? Change in Y = (1/(1-0.90))*50 = 500 New equilibrium income is 2100+500 = 2600 c. Instead of (b), if the government cuts taxes by 50, what is the new equilibrium income? Change in Y = -50*(-0.90/(1-0.90))=450 New equilibrium income = 2100+450=2550
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This note was uploaded on 11/17/2008 for the course ECON 420 taught by Professor Hill during the Spring '08 term at UNC.

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