Test3Answers2006 - Answers Term Test #3 (March 10th, 2006):...

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Answers Term Test #3 (March 10th, 2006): 1. (a) MPS out of disposable income is 0.2 MPC out of national income is 0.6 as follows: C = 10 + 0.8 (Y – 5 – 0.25Y) = 6 + 0.6Y (b) C + I + G + X-M = Y 6 + 0.6Y + 30 + 25 + 14 – 0.1Y = Y 75 + 0.5Y = Y 150 = Y (c) The level of unintended inventory investment is zero since desired expenditures equal output (d) No change Employment insurance benefits represent a transfer of 2 billion to households (and thus increase disposable income by 2 billion), while taxes reduce disposable income by 2 billion. 2. (a) Yes, the road should be maintained. The total of the benefits to the families ($1,300) exceeds the cost of the maintenance ($1,000) (b) No, the road will not be maintained, due to the “free rider” problem. The road is a public good. If the road is maintained, no family can be excluded from enjoying this benefit. The road is also non-rival; that is; its use by one family does not reduce its usefulness to the other families. No family alone has an incentive to
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Test3Answers2006 - Answers Term Test #3 (March 10th, 2006):...

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