EC200-70_HW4Parts1And2_DueNov4_Fall2017 (3).docx

# EC200-70_HW4Parts1And2_DueNov4_Fall2017 (3).docx - EC200-70...

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EC200-70 HW 4 PART 1 (Due back on Nov. 4) Fall 2017 1. Suppose the economy of Clintonia has the following macroeconomic relations: Consunption function: C = 2,000 + 0.75 (Y – T) Investment function: I = 12,000 – 1,500 r Govt. spending: G = 23,000; Exports: X = 4,000 Import function: M = 5,000 + 0.1 Y; Tax function: T = 5,000 + 0.20Y Money demand function: Md = 0.50 Y – 3,500 r; Money supply: Ms = 31,400 Potential output: Yp = 63,400 Equilibrium condition for real sector: Y = C + I + G +(X – M) Equilibrium condition for monetary sector: Money supply = Money demand or Ms = Md (a) The equilibrium equation for the real sector of this economy is: Y = _____________ - _________ r. (b) The equilibrium equation of the monetary sector of this economy is: Y = ____________ + _________r. (c) Given the above equilibrium equation for the real sector and the monetary sector of this economy, the equilibrium values of the following variables are: Equilibrium Value of: Y = ____________; r =_________; T = __________; C = ___________; I = ____________. Govt. Budget Deficit = _____________; and Trade Deficit = ______________. (d) Using the given Yp value, we can say that this economy has a problem of RECESSION / INFLATION: __________________ (write your answer here). (e) Suppose the government spending (G) is changed by 5,000 from 23,000 to 28,000. The new equations for equilibrium in the real sector and the monetary sector of this economy would be as follows: New equilibrium equation for the Real sector: Y = __________________ - _____________ r, and New equilibrium equation for the Monetary Sector: Y = ________________ + ______________ r. (f) Using the above new equilibrium equations, the new equilibrium values of the following variables would be as follow. New Equilibrium Value of:

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Y = ____________; r =_________; T = __________; C = ___________; I = ____________. Govt. Budget Deficit = ______________; and Trade Deficit = ______________. (g) Comparing the equilibrium values of the selected variables from part (c ) and part (f), we see that: (I) Y went UP / DOWN (choose one) because ____________________________________________.
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