Quiz3KEY.doc - PRINCIPLES OF MACROECONOMICS QUIZ#3 COVERING...

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PRINCIPLES OF MACROECONOMICS QUIZ #3 – COVERING CHAPTERS 8 AND 9 ANSWERS 1. What is the relationship between consumption and the following economic variables: household income, wealth, household's expectations about the future, and interest rates?
2. Explain any differences between actual investment and planned investment. Also, is it possible for actual investment to be greater than planned investment? If so, explain.
3. Assume consumption is represented by the following: C = 400 + .75Y. Also assume that planned investment (I) equals 100. Given the information, calculate the equilibrium level of income.
4. Assume that the saving function is S = - 100 + .1Y and planned investment is 40. Calculate the equilibrium level of output using the leakages/injections approach. How much would output contract by if planned investment fell by 10?
multiplier we take 1/MPS or 1/.1 = 10. Therefore, a drop in planned investment by 10 will result in a decline in output of 100 ( Y = m x I).

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