Test3Answers2008 - James E. Pesando Answers Term Test #3...

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James E. Pesando Answers Term Test #3 (March 7th, 2008): 1. (a) C + I + G + X – M = AE 90 + .8(Y - .25Y) + 70 + 240 + 140 - .14Y = AE 90 + .6Y + 70 + 240 + 140 - .14Y = AE 540 + .46Y = AE AE = Y 540 + .46Y = Y 540 = Y(1 - .46) 540 = Y .54 1,000 = Y If Y less than its equilibrium value, inventory investment would be less than desired inventory investment and firms would increase production. (b) The multiplier will decrease, since the marginal-propensity-to-spend out of national income will decrease. At each “round,” the level of induced spending will be less. 2. (a) At the equilibrium number of students, social value exceeds marginal cost. (b) Allocatively efficient level of students occurs where DD (social value) equals SS. The deadweight loss associated with the market equilibrium is the triangle that lies above SS between the market equilibrium and the allocatively efficient number of students. (c)
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Test3Answers2008 - James E. Pesando Answers Term Test #3...

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