PSu ECON 104 HW 6.docx - Score for this quiz 100 out of 100 Submitted Jul 21 at 8:17am This attempt took 55 minutes Part 1 Multiple choice questions

# PSu ECON 104 HW 6.docx - Score for this quiz 100 out of 100...

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Score for this quiz: 100 out of 100 Submitted Jul 21 at 8:17am This attempt took 55 minutes. Part 1: Multiple choice questions: Questions 1-8 are worth 3 points each. Questions 9-12 are worth 4 points each. Question 1 3 / 3 pts Consider the following model i) C = 1500 + mpc (Y - tY) ii) I = 800 iii) G = 500 iv) X - M = 500 - mpi (Y) where: t = the (flat) tax rate mpc = the marginal propensity to consume mpi = the marginal propensity to import suppose mpc = .80, t = .25, mpi = .2 Given the information above, solve for the equilibrium output: Y* = 3300 Y* = 1800 Y* = 1500 Y* = 5500 Y = C + I + G + X-M Y = 1500 + mpc(1-t)Y + 800 + 500 + 500 - mpi Y Y - mpc(1-t)Y + mpiY = 3300 Y [ 1 - mpc(1-t) + mpi ] = 3300 Y = 1 / [1 - mpc(1-t) + mpi] X 3300 Y = 1 / [1 - .8(1-.25) + .2] X 3300 Y = 1.66667 X 3300 Y = 5500 Question 2 3 / 3 pts We know that the formula for the (government) spending multiplier is 1/(1- [mpc(1-t) - mpi]). The value of the government spending multiplier in this problem is: Round to 2 decimal places. 3.33 1.33 1.67 2.55 Y = C + I + G + X-M Y = 1500 + .mpc(1-t)Y + 800 + 500 + 500 - mpi Y Y - mpc(1-t)Y + mpiY = 3300 Y [ 1 - mpc(1-t) + mpi ] = 3300 Y = 1 / [1 - mpc(1-t) + mpi] X 3300 Y = 1 / [1 - .8(1-.25) + .2] X 3300 Y = 1.66667 X 3300 Y = 5500 Question 3 3 / 3 pts When we discussed the multiplier we discussed the impact effect. For example, suppose that G increases by 100 to 600 and we assume, as we often do, that firms match the increase in demand by increasing Y by 100. In round two, this is an increase in income of 100 to consumers . We will trace out exactly where this 100 increase in income goes in the second round . Recall, there are three leakages to address (via taxes, imports and savings). Given that t=.25, we know that .25 of every dollar increase in gross income is a leakage due to taxes. Since the increase in income is \$100, we know the leakage due to taxes is: \$25 \$100 \$75 25 cents We have three leakages: tracing out 100: for every additional dollar in gross income, the consumer saves 20 cents since the mpc = .8. The government gets 25 cents since the tax rate is .25. And finally, 20 cents is leaked out to the purchase of imported goods. Multiplying by 100 we have the following: Y up by 100, savings up by 20, taxes up by 25, imports up by 20, consumption up by 35 Question 4 3 / 3 pts Given that mpi=.2, we know that .2 of every dollar increase in gross income is a leakage due to imports. Since the increase in income is \$100, we know the leakage due to imports is: \$80 \$20 \$100 20 cents We have three leakages: tracing out 100: for every additional dollar in gross income, the consumer saves 20 cents since the mpc = .8. The government gets 25 cents since the tax rate is .25. And finally, 20 cents is leaked out to the purchase of imported goods. Multiplying by 100 we have the following: Y up by 100, savings up by 20, taxes up by 25, imports up by 20, consumption up by 35 Question 5 3 / 3 pts Given that the MPC=.8, we know that .2 of every dollar increase in gross income is saved. Since the increase in income is \$100, we know the leakage due to savings is: \$100 20 cents \$20 \$80 We have three leakages: tracing out 100: for every additional dollar in gross income, the consumer saves 20 cents since the mpc = .8. The government gets 25 cents since the tax rate is .25. And finally, 20 cents is leaked out to the purchase of imported goods. Multiplying by 100 we have the following: Y  #### You've reached the end of your free preview.

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