Test3Answers2007 - James E. Pesando Answers Term Test #3...

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James E. Pesando Answers Term Test #3 (March 9th, 2007): 1. (a) AE = C + I + G + X – M = 20 + 0.9 (Y-0.2Y) + 20 + 15 + 15 – 0.12Y = 70 + 0.6Y AE = Y => 70 + 0.6Y = Y 70 = 0.4Y 175 = Y If Y were greater than 175, then firms’ sales would be less than the amount produced and as a result there would be involuntary inventory investment (i.e. actual inventory investment would exceed desired inventory investment) (b) AE = 20 + 0.72Y + 20 + 15 + 15 – 0.22Y = 70 + 0.5Y AE = Y => 70 + 0.5Y = Y => Y = 140 (i.e. the AE schedule and, thus, the equilibrium level of national income will change) New level of imports: 0.22 * (140) = 30.8 (c) The decrease in autonomous expenditure due to higher taxes (0.9 * 10 = 9) is less than the increase due to increased government expenditures (10), so autonomous expenditures increase . (d) The multiplier will decrease. At each round of induced spending subsequent to a change in autonomous expenditure, the additional induced spending on domestic goods and services will be smaller. 2.
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This note was uploaded on 12/22/2009 for the course BIGBOOK_01 Bigbook_01 taught by Professor Bigbook_01 during the Spring '09 term at University of Toronto- Toronto.

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Test3Answers2007 - James E. Pesando Answers Term Test #3...

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