Solutions to some of the questions - Macroeconomics.docx

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Solutions to Macroeconomics numerical Question 2. a) Government is running a deficit. This will decrease national savings because the MPC is greater than zero. b) S = Y − G − C S = 2, 000 − 600 − 200 − 0.5(2, 000 − T) + 5, 000r Sd = 450 + 5, 000r Sd = Id 450 + 5, 000r = 800 − 15, 000r r = 350/20, 000 r = 1.75% S = 450 + (0.0175)5, 000 S = 537.50 = I C = Y − S − G C = 2, 000 − 537.50 − 600 C = 862.5 c) Sd = 450 + 5, 000r r S = S – 450/5, 000 y-intercept is -9 % Slope is 1/5,0000 Id = 800 − 15, 000r r I = 800 – I/15, 000 y-intercept is 5.33 % Slope is – 1/15,0000 Question 3. a) V = P Y/M In equilibrium Md = M: V = Y 1 β ( r + π ) α where 0 < α < 1 and 0 < β < 1 b) No. The quantity theory of money states that the velocity of money is constant while here it is a function of output and the nominal interest rate. c) ∂V ∂Y = ( 1 β ) Y β ( r + π ) α > 0 ∂V ∂i = α Y 1 β ( r + π ) α 1 > 0 If the nominal interest rate increases, people will hold less money (other assets become more attractive), therefore the turnover of money will be higher. When output increase

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