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

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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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