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Unformatted text preview: 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 economys 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: a. the mpc+mps = 1 b. the mps = 0. c. the apc+aps = 1 d. both a. and c. e. none of the above Y C Iplanne d G Taxe s Exports Im ports 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 3) In a closed economy with no government, which one of the following will occur when the economy is in equilibrium: a. S=C b. Y=S c. C=Y d. I=C e. none of the above 4) A reduction in the marginal propensity to consume will: a. cause the AE d line to become flatter and a given change in investment to have a smaller effect on output. b. cause the AE d line to become flatter and a given change in investment to have a greater effect on output. c. cause the AE d line to become steeper and a given change in investment to have a smaller effect on output. d. cause the AE d line to become steeper and a given change in investment to have a great effect on output. e. cause the AE d line to shift up....
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