20072prbset2

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

This preview shows pages 1–2. Sign up to view the full content.

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.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern