solution to Quiz 1 (Feb 1 2010)

# Solution to Quiz 1 - Quiz 1 would be 8.65 Mr Nugent Econ 305 Spring 2010 TOTAL POINTS 7.5but perfect score Your Name SID 1 Suppose the Zimbabwes

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Quiz 1 Mr. Nugent Econ 305 Spring 2010 TOTAL POINTS: 7.5but perfect score would be 8.65 Your Name:_____________________________________________ SID____________________ 1. Suppose the Zimbabwe’s economy is represented by the following equations: Z = C + I + G C = 500 + .5Y D T –TR = 100 I = 300 G = 200 Y D = Y – T +TR a. Given the above variables, calculate the equilibrium level of output. Y (.75) In equilibrium, we have G I TR T Y c c G I C Z Y + + + - + = + + = = ) ( 1 0 Thus we can calculate the output Y as [ ] 1900 ) 100 5 . 200 300 500 ( 5 . 1 1 ) ( 1 1 1 0 1 = × - + + - = - - + + - = TR T c G I c c Y b. Using the ZZ-Y graph, illustrate the equilibrium level of output for this economy. Label axes (0.5 points) 1 Production Demand 45 Income Y Demand Z, Production Y Equilibrium Y = Z 1900 950 1900 ZZ

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c. Now, assume that consumer confidence decreases as a result of increasing political fragmentation between the two major coalition parties in the government causing a reduction in autonomous consumption (c 0 ) from 500 to 400. (1) What is the new equilibrium level of output? By how much does income change as a result of this event? (0.5) The new equilibrium level of output is: 1700 ) 100 5 . 200 300 400 ( 5 . 1 1 = × - + + - = Y So the change in Y is 200 1900 1700 - = - = - = Y Y Y (2) What does the investment-income multiplier mean and how do you find it for this economy. How large is it ? (0.25 points) The investment-income multiplier means the increase in the level of output if the investment increases by 1 unit. In this economy, the investment-income multiplier is: 2 5 . 1 1 1 1 1 = - = - c (3) What does the Transfer Payments -income multiplier mean and how do you find it for this economy. How large is it ? (0.25) The transfer payments -income multiplier means the increase in the level of output if the transfer payments increase by 1 unit. In this economy, the transfer payments-income multiplier is: 1 5 . 1 5 . 1 1 1 = - = - c c d. Graphically illustrate the effects of this change in autonomous consumption on the demand line (ZZ) and Y. Clearly indicate in your graph the initial and final equilibrium levels of output. Label axes
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## This note was uploaded on 02/11/2010 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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Solution to Quiz 1 - Quiz 1 would be 8.65 Mr Nugent Econ 305 Spring 2010 TOTAL POINTS 7.5but perfect score Your Name SID 1 Suppose the Zimbabwes

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