PS4 - Economics 102 Introductory Macroeconomics Spring 2005...

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Economics 102 Introductory Macroeconomics - Spring 2005, Professor J. Wissink Problem Set 4 1) Consider the following information about a hypothetical open economy. a) What is the equilibrium level of national income, Y * ? b) Graph its determination. c) What is the: marginal propensity to consume out of Y (mpc)? d) What is the marginal propensity to invest out of Y (mpi)? e) What is the marginal propensity to export out of Y (mpx)? f) What is the marginal propensity to import of Y (mpm)? g) In this open economy the general formula for the investment multiplier is: K I = 1/(1-mpc-mpi-mpx+mpm) What is the numerical value of the multiplier given your answers to c-f? h) What does the multiplier tell us? i) What would happen to the equilibrium level of national income if planned investment exogenously increased by \$2.5 Billion? j) Is this economy’s budget balanced? 2 . Multiple Choice: 1) If the “Keynesian” investment multiplier is 2.5 and if investment rises by \$20 while government spending falls by \$10 (other things remaining constant), by how much will the equilibrium level of income (Y*) rise? a. 0. b. 25. c. 40. d. 50. e. By an indeterminate amount. 2) If income can only go to consumption and saving then the following must be true: Y C Iplanned G Taxes Exports Imports 300 180 50 120 100 120 110 400 260 50 120 100 120 110 500 340 50 120 100 120 110 600 420 50 120 100 120 110 700 500 50 120 100 120 110 800 580 50 120 100 120 110 Note: all values are in billions of dollars

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3) In a closed economy with no government, which one of the following will occur when the economy is in equilibrium: 4) A reduction in the marginal propensity to consume will: 5) Refer to the figure depicting the relationship between income received (Y) and consumption spending (C) for a given household. Assume there is no government spending and taxes. This household's saving will be zero when income is: a. 1,400.
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