20072prbset2 - METU Department of Economics Econ 202...

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1 METU Department of Economics Econ 202 Macroeconomic Theory 2007-2008 Spring Semester Instructor: Ebru Voyvoda and Şirin Saraçoğlu Teaching Assistant: Gizem Koşar Problem Set 2 (OB Chapter 3) Please solve the questions marked with (*) sign as homework. (*)Question 1: You are given the following information about the economy of Dollarland. When income is zero, consumption expenditure is $80 billion. The marginal propensity to consume out of income (MPC) is 0.675. Investment expenditures is $400 billion; government purchases of goods and services are $600 billion; a) If taxes are a constant $500 billion and do not vary as income varies. i) Write down the consumption function out of disposable income (Y d ) and out of income (Y) separetly. ii) Write down the saving function out of disposable income (Y d ) and income (Y) separately. iii) Does MPC out of Y d and marginal propensity to save (MPS) out of Y d sum up to 1? Why or why not? Does the same result hold for the MPC and MPS out of Y? iv) Calculate total autonomous expenditure. v) What would be the autonomous expenditure if 0.675 was MPC out of Yd instead of Y? vi) Calculate the multiplier. vii) Write down the equation that describes the demand for goods (Z). viii) Calculate the equilibrium output algebraically and show it graphically. b) If, in addition to an autonomous amount of $500 billion, taxes were to increase by $10 billion when income increased by $100 billion, how would your answers to parts a.i to a.viii change? Question 2 : Suppose in a hypothetical economy with no government, the consumption function is given by C = 100 + 0.8Y d , while investment is given by I = 50. a) What is the equilibrium level of income in this case? b) Corroborate your finding in (a) with an alternative way of thinking about the goods market equilibrium.
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