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
nonsmoothing 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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