Practices question combine_essay_khang.docx

Practices question combine_essay_khang.docx - ECON649/991...

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ECON 649/991 FINAL EXAM 2017 (2) PRACTICE QUESTIONS ON THE MULTIPLIER MODEL 1. What is the point or basic idea contained in the multiplier model ? How does it explain this basic idea or problem ? an effect in which an increase in spending produces an increase in national income and consumption larger than the initial amount spent through combining different patterns of consumption including smoothing and non-smoothing households to represent consumption spending as a whole economy. 2. Let s assume that the economy is represented by the following four sectors households , firms , a government and the country s relationship with the rest of the world through trade . Households are represented by the following : C = c 0 + c 1 ( 1 t ) Y Firms are represented as organisations that invest in physical capital I = I The government of our economy is represented by the following : G = G The country s relationship with the rest of the world is represented by the following : X = X M = M + mY a) Households in this simple model are represented by an aggregate consumption function . Explain the different components of the consumption function . C = c 0 + c 1 ( 1 t ) Y Household consumption depends on post - tax income . The government charges tax = t , which is a proportion of income . Disposable income or the income after payment of tax = (1- t ) Y C 1 or marginal propensity to consume is the fraction of disposable income . Which will determine that consumption function is C = C 0 + C 1 (1- t ) Y b) Assume the economy of this country is in equilibrium . Find the equation for this equilibrium level of income . ( You must include the steps in finding this equilibrium equation ). output = aggregate demand = consumption + investment + government spending + net exports output = aggregate demand output = consumption + Investment + government spending + net exports
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Therefore Y = AD= ? 0+ ? 1(1 ? ) ? + ? + ? + ? ?? ? (1 ? 1(1 ? )+ ? )= ? 0+ ? + ? + ? y c 0 + I + G + X M ¿ 1 1 c 1 ( 1 t )+ m ¿ 3. Assume this economy as represented by our simple multiplier model has the following values . t = 0.25 ;m = 0.15 ;c 1 = 0.75 I = 100 trillion;c 0 = $ 30 t ;G = $ 150 trillion; X = $ 80 trillion ; M = 10 trillion a) Calculate the multiplier . Explain your result . Y= 1 1 c 1 ( 1 t )+ m = 1 1 0.75 ( 1 0.25 ) + 0.15 = 1.7 b) Calculate the equilibrium level of income ( Y ). ( You must include the steps in finding your result ). y ¿ 1 1 c 1 ( 1 t )+ m [ c 0 + I ( r ) + G + X M ] = 1.7 350 = $ 595 t c) Illustrate this equilibrium level of income on the appropriate diagram . ( Label this equilibrium point as A ). ghi 45 độ d) Calculate the amount that households spend on consumption in equilibrium . ( You must include the steps in finding your result ). C = c 0 + c 1 ( 1 t ) Y = 30 + 0.75 ( 1 0.25 )∗ 595 = 30 + 334.69 = $ 364.69 t e) Calculate the amount that all the sectors spend on imports in this equilibrium . ( You must include the steps in finding your result ).
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