ps5ans

# ps5ans - 3 Y=C I G NX=\$200 0.8DI \$600 \$1000 \$100 =\$200...

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Economics 205: Principles of Macroeconomics Mark Moore Fall 2008 Problem Set 5: Solutions 1. Equilibrium condition: Y=C+I+G+NX=\$300 + 0.75DI + \$900 + \$1300 -\$100 =\$300 + 0.75*(Y-\$1200) + \$900 + \$1300 - \$100 Y*(1-.75)=\$2400-0.75*\$1200=\$1500 Y = [1/.25]*\$1500 = 4* \$1500 = \$6000 2. You know enough to answer this question directly, without solving for equilibrium again. Investment increases by \$200. The multiplier is 1/(1-.075)=4. Therefore, Y increases by 4*\$200 = \$800. So, Y is now \$6800. In the income-expenditure diagram, the Z line shifts up and output increases. The AD curve shifts to the right. The horizontal shift of the AD curve is \$800.
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Unformatted text preview: 3. Y=C+I+G+NX=\$200 + 0.8DI + \$600 + \$1000 +\$100 =\$200 + 0.8*(Y-\$1000) + \$600 + \$1000 + \$100 Y*(1-.8)=\$1900-0.8*\$1000=\$1100 Y = [1/.2]*\$1100 = 5* \$1100 = \$5500 If G rises by \$100, Y increases by (1/(1-.8))\$100=5(\$100)=\$500 If T rises by \$100, Y falls by (.8/(1-.8))\$100=4(\$100)=\$400. If both G and T rise by \$100, output rises by \$500 - \$400=\$100. In this case, the AD shifts right. The horizontal shift is \$100. 4. If NX=0, S=I, where S = national saving and I=investment. This is true whether there is an inflationary gap, a recessionary gap, or no gap at all (i.e., if the economy is at full employment)....
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## This note was uploaded on 06/26/2009 for the course ECON 203 taught by Professor Al-sabea during the Spring '05 term at USC.

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